Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

Weekly stock market memo

Warren Buffett is holding a boatload of cash

by

Warren Buffett

Berkshire Hathaway’s cash increased to $128.65 billion in the fourth quarter of 2022 up from nearly $109 billion in the third quarter according to the latest Berkshire Hathaway annual letter. Even more astonishing is Apple represents nearly 40% of Berkshire’s portfolio, a stock that he purchased more of in Q4. My favourite quote from the annual letter: “When you are told that all (stock) repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)”. Read the full letter here.

US inflation in January rises higher than expected

The Fed’s preferred measure of inflation – the core personal consumption expenditures price index increased 4.7% from a year ago adding to the expectation that the Fed will have to keep rates higher for longer. Inflation as we all know and love it including food and energy rose 5.4%.

HSBC profits from higher interest rates

Quarterly pretax earnings came in at $5.2 billion versus $2.7b billion for the same period last year. Full-year profits at $17.5 billion were lower than last year’s $18.9 billion due to the costs of selling a French bank. Rising credit losses were blamed on higher inflation.

Walmart and Home Depot: the consumer is under pressure

Walmart CFO John David Rainey: “The consumer is still very pressured… and if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.”. Home Depot Chief Financial Officer Richard McPhail: “We’ve seen an increasing degree of price sensitivity as the year’s gone on, which is actually sort of what we predicted in the face of persistent inflation.”

Tesco, ASDA and Morrisons don’t want you to eat real food

The rising costs of production such as energy have curtailed the supply of fresh fruit and vegetables to UK supermarket shelves. As a result, they’ve limited what consumers can purchase. ASDA has introduced ‘MAX3’ – “We have introduced a temporary limit of three of each product on a very small number of fruit and vegetable lines, so customers can pick up the products they are looking for.”

Intel cuts dividend by 65%

There is now open talk of NVIDIA replacing Intel in the DOW after its stock plunged from $68 a share in April 2021 to $25 this week. On top of cost cuts, CEO Pat Gelsinger intends to grow the dividend over time after a drastic cut – “The board and I continue to view the dividend as a critical component to the overall attractiveness of Intel”. A declining PC market and demand for its own products – its customers simply have too many chips and need to work through their own inventories. “While we know this dynamic will reverse, predicting when is difficult”. 

Fed minutes: the inflation fight continues

There are signs that inflation is falling, but labor markets “remained very tight, contributing to continuing upward pressures on wages and prices“. Members believe that ongoing rate hikes will be necessary because more evidence of progress across a broader range of prices would is required. A few members of the FOMC members wanted a half-point or 50 basis-point rather than the recently announced quarter-point rise a few weeks ago.

St. Louis Fed President James Bullard wants rates north of 5%

“We have a good shot at beating inflation in 2023”. Bullard wants rates to go higher now so that in his opinion, the FOMC has a better chance of beating inflation in 2023. “Our risk now is inflation doesn’t come down and reaccelerates, and then what do you do? We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s … and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”

The FTSE 100 hits 8000

by

City of London

FTSE 8000

The London Stock Exchange has always been a mining/energy-centric exchange which has helped to boost the FTSE 100 over the historic and record-breaking 8000 mark. Putin’s invasion of Ukraine and the fallout from global supply chain issues resulting from the global coronavirus pandemic have helped energy companies listed in London (and around the world) to record profits. The likes of Shell and BP have already seen sharp increases in their share prices as a result. They’re expensive; don’t let their single-digit PE ratios fool you.

UK semiconductors scream for money

And so they should given the massive investment commitments the US government and the EU have made to secure their own supplies of chips. The threat to Taiwan from China has not gone away and they still covet Taiwan’s reunification with the mainland which threatens the global supply chain of chips. iPhones, cars, washing machines – a whole host of everyday electronic items have not been supplied to the market due to the lack of chips and last year’s lockdowns in China. Rishi Sunak needs to announce something soon or risk firms moving operations overseas. The UK’s largest exchange-listed stock, Oxford Instruments, with a high teens ROCE and PER of 26.54 is in growth stock territory. Its half-yearly report showed an almost 18% increase in revenue. Ian Barkshire, Chief Executive said ‘we anticipate higher production in the second half, combined with the positive impact of recent price increases as we convert our record order book. This provides good visibility for an expected improvement in trading in the second half’.

Biden’s bombs

Or tanks. Just keep an eye on Biden’s proposed record defense spending proposals rumoured to eclipse the $858 billion enacted in the 2023 fiscal year. It’s thought that the Pentagon wants to accumulate weapons to refill US stockpiles while continuing to send munitions to Ukraine. I’ll state the obvious: look at stocks in the defense industry that have growth plans beyond the Ukraine conflict and the recent Chinese Balloon shootings. Since a lot of defense relies heavily on tech, defence-orientated tech stocks including cyber security may not go amiss. For example, Lockheed Martin is the US government’s largest defence contractor.

Plus 500 just keeps on making money

The FTSE 250 firm describes itself as a ‘global multi-asset fintech group operating proprietary technology-based trading platforms’. It’s a stockbroker that also allows users to access derivative products such as futures, options, and contracts for difference. Net profit in FY 2022 increased by 19% to $ 370.4 m (FY 2021: $310.6m) and basic earnings per share increased by 25 % to $3.81 (FY 2021: $3.06). Plus 500 has an extremely strong balance sheet. David Zruia, Chief Executive Officer said ‘we are in an extremely exciting strategic and commercial position, with multiple potential growth opportunities available, particularly in the US futures market’.

UK inflation slows in January

10.1% for January versus 10.5% in December the third month in a row of lower CPI according to the Office of National Statistics. Milk and olive oil price increases are making my weekend morning ritual of pancake making even more expensive; as for the eggs required in the recipe, I treat them more like caviar now. Inflation is still at a 40-year high and the Bank of England has already raised interest rates 10 times in a row to 4% with the market expecting rates to rise again when The Bank meets on 23rd March. Remember when inflation was meant to be transitory?

US inflation rises in January

CPI rose 6.4% for the previous 12 months to January 2023 compared with the same period last year. It rose 0.5% for January alone. Shelter, food, natural gas, and filling up your tank were the standout categories influencing the numbers. As inflation stays high, so will interest rates. The market is expecting a 0.25% increase in interest rates at the next Fed meeting scheduled for the third week of March. Dallas Fed President Lorie Logan said ‘we must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions’.

Why Adidas is a relatively unpopular large company

by

An adidas trainer, black and white

Adidas reeling from Kanye colab

“The numbers speak for themselves. We are currently not performing the way we should,” CEO Bjørn Gulden said in a press release this week that also alluded to its inability to sell its Yeezy inventory with a potential impact of $1.3 billion. Last October the firm severed ties with Yeezy’s founder Kanye West after his well-publicised antisemitic tirades. In July 2021, shares traded at EUR319, today they’re at EUR139, with a dividend yield of 2.37%, and a PE ratio of 19. Adidas has all the hallmarks of a relatively unpopular large company.

Rinse and repeat

As if we didn’t get it first time around last week when the fed increased interest rates by 25 basis points, Fed chair Jerome Powell at the Economic Club of Washington said “the disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,”. Of the labor market, Powell ‘didn’t expect it to be this strong’ after a 517,000 print for jobs added in January. Those damned workers are just fouling the recovery. “My guess is it will take certainly into not just this year, but next year to get down close to 2%.” That’s a bet I’m willing to take.

Record profits at BP

Like ExxonMobil and Shell last week, the energy sector continues to reap the benefits of lockdowns and Putin’s invasion of Ukraine creating massive demand for oil with BP announcing record profits that more than doubled to $27.7bn (£23bn) in 2022. In the fourth quarter of 2021, Chief executive Bernard Looney said: ‘When the market is strong, when oil prices are strong and when gas prices are strong, this is literally a cash machine.’

A high dividend yield at Barrett Developments

With a dividend yield of nearly 8%, property developer Barratt Developments released its half-year results this week and decided to cut its dividend. David Thomas, Chief Executive said ‘Whilst we have seen some early signs of improvement in current trading during January, we will need to see continued momentum over the coming months before we can be confident that these challenging trading conditions are easing’. Pre-tax profits, earnings, and revenue all increased versus the same period last year. Forward sales were reported as 10,854 homes v 15,736 last year and the firm pointed to the pressure first-time buyers are under, roadblocking a clear pathway to recovery in 2023. Barratt has a PER of 5.78 and a price to tangible book of 1.03.

Disney cuts 7000 from workforce, proxy fight is over

Activist investor Nelson Pelz bought Disney stock at $92 a share in November 2022 for $865 million, launched a proxy fight and now the stock is worth $118 a share – a paper profit of $154 million after his stake increased in value to $1.1 billion. Peltz called off the fight this week after the announcement of a cost-cutting plan to the tune of $5.5 billion and a headcount cull of 7000 employees. Disney announced quarterly earnings per share of 99 cents, beating expectations, and revenue and subscriber numbers that came in as expected. Bob Iger said that “We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders”.

Bellway’s strengthening balance sheet

Like Barratt Developments, Bellway’s forward sales have declined and its customers are struggling with increased pressure from higher mortgage rates. Like all good housebuilders, it has large cash reserves and expects revenue to increase throughout 2023 despite the economic backdrop. ‘As the near-term economic outlook remains uncertain, we continue to take actions to maintain the Group’s balance sheet resilience. The measures include a freeze on new recruitment, limiting land approvals and a highly disciplined approach to production expenditure, as we align investment in work-in-progress to sales demand.’ When interest rates decline, you’ll find that demand for their homes will start to increase. In this climate, its easier for housebuilders to build their balance sheets rather than homes.

UK avoids recession

GDP fell 0.5% in December but that was not enough to impact growth for the final three months of 2022, coming in at 0% growth for the quarter. Last week The Bank of England said that it still expects a recession for the UK in 2023, but at a reduced severity than their previous forecast. The Office for National Statistics said that there were falls in services, education, and transport. Britain is scraping along the bottom quite nicely thank you.

How earnings from oil smash records whilst tech disappoints

by

ExxonMobil gushes $56 billion in profits

It’s a record yearly profit for the company which previously stood at $45.2 billion in 2008. That was when oil hit $142 a barrel. The EU pre-empted Exxon’s swag with a $1.3 billion windfall tax in the fourth quarter. Shares finished the week at £112 also an all-time high for the firm. As noted two weeks ago, Putin’s invasion of Ukraine will prompt eye-watering earnings from the energy sector. Exxon’s Chief Financial Officer Kathryn Mikells said ‘strong markets, strong throughput, strong production, and really good cost control’ helped the firm to its record earnings.

Google earnings drop in Q4

Alphabet’s earnings came in at $1.05 per share, revenue came in at $76.05 billion continuing a downtrend trend in quarterly revenue growth since Q2 of 2021. In November 2021, shares reached an all-time high of $148 and have since fallen 29% to $105. The company also warned of a $2.3 billion charge it will sustain in Q1 of 2023 related to the 12,000 employees it fired in January. Further charges related to real estate – specifically its reduced office space, will start at $500 million in Q1 and further real-state charges are likely moving forward. Headcount growth cost it an extra 10% in operating expenses but CEO Sundar Pichai reiterated its focus on AI. With Google’s current legal proceedings in the US, there’s a lot for the executive team to be working on and shareholders to be mindful of.

Apple earnings growth slides

CEO Tim Cook blamed the macroeconomic environment and the lockdowns in China for not producing enough iPhones and iPads to sell for the latest quarterly earnings decline. Apple posted EPS of $1.88, down 10.9% YOY, revenue was down 5.49% YOY. Apple’s quarterly earnings have been declining in growth since the beginning of 2021, albeit from lofty heights (54.1% in Q1). The firm said that production levels of the iPad and iPhone are back to ‘acceptable levels’. The number of Apple active devices increased from 1.8 billion to 2 billion, including first-time buyers of the Apple Watch. Cook mentioned costs are being cut and hiring has slowed but did not see a need to slash headcount like others in the tech space. Despite the negative decline in earnings growth, Apple has faired much better than its tech peers due to prudent management of its hiring process, innovative product expansion (Apple Pay, Card, Music), and bringing new customers on board its product range despite the macro headwinds of the last few years: resilience.

Amazon issues guidance for Q1

Amazon expects YOY growth of revenue of between 4% – 8%, and online store sales declined 2% YOY. Consumers are slowly switching from e-commerce to high-street shopping since the end of the pandemic. CEO Andy Jassy, on top of announcing an 18,000 headcount cull last month, has frozen hiring, halted warehouse build, and is ‘… working really hard to streamline our costs and trying to do so at the same time that we don’t give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term’. Amazon Web Services – its cloud business – declined in growth for the fourth quarter from 27.5% in the third, to 20%. Amazon earned 3 cents per share and operating income declined YOY due to $2.7 billion of charges, some of which related to severance payments. Shares are trading at $103, down from $183 in November 2021.

Meta shares explode 23% after results

Meta shares rocketed 23% in after-hours trading when the firm announced a $40 billion stock buyback, and beating revenue expectations for the fourth quarter. CEO Mark Zuckerberg said Meta’s “management theme for 2023 is the year of efficiency and we’re focused on becoming a stronger and more nimble organization.” Meta announced 11,000 layoffs last November. There’s also less expenditure expected in the future due to a switch to more cost-effective data centres. The Reality Labs unit responsible for the development of the Metaverse is expected to increase operating losses in 2023 ‘significantly’. Shares are currently trading at $186, down from $378 in September 2021. Without the share buyback, the value of Meta is in decline due to weak advertising demand and Tik Tok dominating ad revenue growth. Meta’s ad revenue declined 4% in the quarter and continues to be ‘impacted by the uncertain and volatile macroeconomic landscape’ according to Meta CFO Susan Li. Ad revenue represented 97% of Meta’s total revenue in the quarter.

Shell’s 115-year profit record

$39.9bn (£32.2bn) in 2022, the highest in its 115-year history. The price of Brent crude oil went to almost $128 a barrel after Putin’s invasion of Ukraine last year. It’s currently trading at $83. Shell said was due to pay $134m in a UK windfall tax for 2022 and more than $500m in 2023. Shell had paid $13bn in taxes globally in 2022 and only derives around 5% of its revenue from the UK.

US raises interest rates by 0.25%

The market expected it and The Fed delivered. A rise of 25 basis points from Jerome Powell and his team this week, the highest since October 2007. Inflation is still at its highest levels since the 1980s. Powell noted that inflation “has eased somewhat but remains elevated… inflation data received over the past three months show a welcome reduction in the monthly pace of increases… while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”

UK interest rates highest for 14 years

The Bank of England raised interest rates by 0.5% to 4%. The market is expecting rates to peak at 4.5% in the summer before heading back down. The Bank has a 2% inflation target but prices are rising at 10.5%, a 40-year high. The market believes inflation reached its peak in the UK last October at 11.1%. Both the Bank of England and The Fed are in lockstep both with inflation and rate rises, but not on the upcoming recession – the IMF stated this week that the UK will be the only major economy to shrink in 2023, forecasted to be -0.6%.

Why lower interest rate rises are less toxic for your portfolio

by

Image by Elliot Alderson

0.25 or 0.50? These are the numbers getting everyone’s knickers in a twist. The numerical obsession with interest rates is tied to the fact that stocks like low interest rates. The next FOMC meeting is in a few weeks’ time starting 31st January and Federal Reserve Governor Christopher Waller said last Friday “there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting.” And it’s not just Waller. Philadelphia Fed President Patrick Harker said in his view “hikes of 25 basis points will be appropriate going forward”. The expectation has been set.

Machine learns like lightening, very very frightening

Google and Alphabet CEO Sundar Pichai is frightened of future internet users turning to AI rather than using its search engine. It’s clear why: Sridhar Ramaswamy from Google’s ad team between 2013 and 2018, said that ChatGPT could prevent ChatGPT users from clicking on links with ads. Ads that generated approximately $208 billion dollars (81% of 2021 revenue). The recent lawsuit filed against Google by a coalition of 8 US states and the Department of Justice accusing them of ‘destroying competition in the ad tech industry’, may prove to be an untimely distraction. The demo version of Google Search with AI chatbot that Google promised by the firm later this year can’t come soon enough for shareholders.

Google needs a lawyer

The US Department of Justice along with eight states is suing Google. But before we get into that, let’s remind ourselves about the staggering worldwide backlash against Google’s dominance: a $2.73 billion fine by the EC in 2017, a $4.3 billion fine by the EU in 2018, a $1.49 billion fine by the EC once again – all for antitrust issues. Historical fines for Google in the US have been nowhere near these figures. This time around, the lawsuit is seeking to divest its advertising businesses as a way of opening up competition in the ad space. Are we about to see the US admonish one of its own corporate children?

Microsoft’s layoffs cost it a packet

Microsoft earned $2.32 per share. The market was expecting $2.29. All good in the hood. Microsoft said it recorded a charge of $1.2 billion for the quarter, $800 million of which related to the job cuts. Oh, there’s also a slowdown in its cloud and business software divisions for 2023 according to the company. “During the pandemic, there was rapid acceleration. I think we’re going to go through a phase today where there is some amount of normalization in demand,” Chief Executive Officer Satya Nadella. Microsoft earnings are important because it’s seen as an example of the wider tech sector, which also happens to have a major influence on the tech-heavy S&P 500. Its slowdown in December coupled with an acknowledgment of a general slowdown in PC sales forecasted for 2023 looks as though the recession is starting to influence forward earnings “In our commercial business we expect business trends that we saw at the end of December to continue” – Amy Hood, Cheif Financial Officer, Microsoft.

UK government likes debt

From £16.7 billion in December 2021, to £27.4 billion in December 2022, the UK government hits record borrowing. Way above expectations of £17.8 billion. Inflation, household energy bills assistance, student loans, and April’s national insurance policy reversal is to blame. A significant proportion of student loans will never be repaid and the government is forced to recognise this under new accounting rules adding to the indebtedness.

Recession in the UK

Two data points: 1) the S&P global CIPS UK flash composite purchasing managers’ index saw the ‘sharpest drop in business activity for two years’. January data highlighted a sustained downturn in UK private sector business activity. The overall rate of decline accelerated to its fastest for two years. “Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession”, Chris Williamson, chief business economist at S&P Global Market Intelligence. 2) Anna Leach, CBI Deputy Chief Economist, said: there are signs that demand is easing too, with order books weakening sharply, spare capacity in the manufacturing sector rising and the share of firms citing the strength of sales or orders as a potential constraint on output rising to its highest in almost two years.” If the patient is the UK economy, it’s like two doctors coming to more or less the same conclusion.

Boeing’s flying low

A $663 million loss for the fourth quarter and a $5 billion loss for the full year with a loss per share of £1.75 v expected earnings per share of 26 cents. It’s the sixth quarterly loss in a row. “While we have made meaningful progress, challenges remain and we have more work ahead to drive stability in our operations and within the supply chain,” Chief Executive Officer Dave Calhoun. Boeing is betting on a full re-opening in China and the easing of supply-chain issues that slowed the production of aircraft, especially jet engines. As an old-school value investor, I can’t help thinking back to the massive losses Warren Buffett suffered when he went full ham on airline stocks only to sustain huge losses. No thanks.

Tesla’s earnings turn south

You’ll see the headlines: record revenue at Tesla. What you won’t see, at least not as clearly, are earnings of $1.19 per share v $2.52 in the same quarter last year. Or that gross margins are the lowest in five years and operating cash flow is down 29% from last year. Tesla has already begun well-publicised price cuts on its vehicles which helped ramp up orders. Musk is upbeat about Tesla and thinks he can make up to 2 million vehicles this year which he says will all be sold if they can make them fast enough. ‘Twitter is actually an incredibly powerful tool for driving demand for Tesla’ Musk responded when asked if his political rants hurt the firm. He even had the gall to encourage other automakers to make use of Twitter for marketing their own brands. Elon is a well-received businessman here at Wealth Accumulated.

US Fourth quarter GDP down

A weakening housing market and a slowdown in corporate spending reduced fourth quarter GDP to 2.9% from 3.2% in the third quarter. Consumer spending (68% of GDP) increased 2.1%, fuelled largely by consumer debt, even as retail sales declined in December by 1.1%. Are consumers maxed out? Most commentators believe a recession is coming, albeit a mild one despite these numbers.

Diageo

Earnings per share shot up 20% for the firm this week to 100.9p at the half-year stage. The company owns the most enviable portfolio of drinks brands in the world. Baileys, Johnnie Walker, Guinness, Smirnoff, and a suite of Scotch Whiskeys to name a few. Price rises for its products and an increase in consumers drinking its premium brands helped to boost revenue. It, like a lot of the large caps that sell to China, is betting on increased revenue in 2023 when China re-opens.

Intel

Just 10 cents per share and a $664 million net loss in the fourth quarter of 2022. Intel is predicting a net loss of $15 cents per share in the first quarter of 2023. Intel elected not to give full-year guidance for 2023 but did indicate $11 billion in sales in the March quarter, a 40% year-over-year decline. Their customers have a deluge of chips already and need to work through their supply before buying Intel chips again, at least that’s what analysts are saying.

Chevron pumps profits

Putin’s invasion of Ukraine has prompted what will no doubt be eye-watering earnings from the energy sector. Chevron made a record $36.5 billion profit for 2022, more than double the previous year. The $75 billion share buyback program it announced has President Biden calling it a ‘slap in the face’ for Americans coping with the ravages of flooding in California.

Rolls Royce is a burning platform

The CEO of Rolls Royce, Tufan Erginbilgic gave his employees an analogy: when an oil platform in the North Sea is on fire, you need to jump into the volatile and freezing water to survive. That’s what he meant when referring to the firm as a ‘burning platform’. Covid was dismissed as no more than an excuse for what he called the firm’s chronic underperformance. He will likely announce a brutal restructuring following up his tough words with tough action.