Wealth Accumulated

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

inflation

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’.

Apple: the FAANG that hasn’t culled overhead. Yet.

by

Macbook on a wooden table
Apple did not go on the same hiring spree as other FAANGS during the 2020 lockdowns

I remember laying down next to my allotment plot slash community garden during the summer of 2020. There was literally nothing else to do. I was happy with my employer, with my work. There was no reason for me to leave or seek alternative employment. That was not the case for millions of people who began applying for roles at big tech firms with the extra time they had on their hands to re-orientate their working lives.

Amazon ended up hiring 500,000 employees in 2020, and another 310,00 in 2021 to “meet the needs of our customers while ensuring the safety of our employees… [and] investing for customers and employees during these unprecedented times”. Microsoft hired to a less aggressive extent but the real ‘winner’ was Apple who kept the same hiring rates since 2016, notching the lowest percentage increase in headcount among the FAANGS.

This week, Microsoft CEO Satya Nadella said he will be “making changes that will result in the reduction of our overall workforce by 10,000 jobs through the end of FY23 Q3.” The company will sustain a $1.2 billion charge in its Q2 earnings next week “related to severance costs, changes to our hardware portfolio, and the cost of lease consolidation as we create higher density across our workspaces.” Gotta pay off all those employees somehow. Amazon’s Doug Herrington, the company’s worldwide stores chief, said in a memo Wednesday that they will cull 18,000 employees “so we can continue investing in the wide selection, low prices, and fast shipping that our customers love.

Finally, Google and Alphabet’s CEO Sundar Pichai said he took “full responsibility” for announcing 12,000 job cuts and that the company had rapidly expanded headcount in recent years “for a different economic reality than the one we face today.” The perverse nature of capitalism means that these layoffs will prove profitable for shareholders 1-3 years from now. Traders have already jumped into these stocks on the back of them being huge winners over recent years, but the fact is that as a collective and a large component of the S&P 500, they are still repairing the damage that bloat can do to a business. It’s worth keeping an eye on their earnings in 2023 for sure.

Inflation is falling in the UK. Except for food

“Baked beans are up over 50% in a year. Tinned tomatoes from Spain, also up 50%.” Philip de Ternant, a food wholesaler sounds exasperated on the news that inflation ‘fell’ from 10.7% in November to 10.5% for December. But it’s just not food that continues to see a tsunami of price rises whilst the rest of the inflation basket trickles downwards. Airfares, hotels, restaurants. Basically, if you want to sustain yourself whilst having any fun at all, your financial masters have made it impossible.

When’s a good time to FTSE?

Early in my dating life, I would take a girl to places that had tables. That was my sole choice for the date venue. Didn’t matter if it was a pub, cafe, or restaurant. Tables were where the action was in my mind. I could work my magic charming damsels and the table was like a wingman, allowing me to draw closer, squeeze a hand, and of course play footsie. I remember one particular barman of a local who was a family friend was so impressed with my dating skills that he gave me and my girl free drinks all night. That story is in no way connected to whether or not I think the FTSE 100 is trading at a discount to intrinsic value. Which it isn’t, especially as it’s trading near all-time highs. Now is not the time to FTSE.

The Christmas high street numbers ain’t pretty

US retail sales fell 1.1% in December according to fresh data from the Commerce Department. On top of that, wholesale prices measured by the producer prices index dropped 0.5% for December, more than expected 0.1% showing signs that the US economy is slowing down. The Dow ended the day down 600 points in response. The last time PPI dropped by this amount was in April 2020 raising fresh concerns about a recession.

In the UK, December sales fell by a record 5.8% compared with December 2021 as inflation, and in particular energy costs for households have soared over the past 12 months. It’s well known that where sales growth has been recorded, consumers spending more has been down to corporations raising prices due to inflation. This is the vicious cycle that the Fed and central banks around the world want to stop. Their only weapon in this fight is higher interest rates at the risk of destablising the economy.

Stock in focus: Ferrexpo Plc

As with any stock that’s main business is the production of a commodity, the share price can see swings wilder that an Andrew Tate house party. Chill out nothing’s been proven yet. This FTSE 250 producer and exporter of high-grade iron ore pellets to the global steel industry is based in central Ukraine, which explains some of the most recent price extremes. In the fourth quarter of 2022, Ferrexpo produced 0.4 million tonnes of iron ore pellets v 3.1 million tonnes in the same quarter of 2021.

This reduction is primarily due to the loss of electrical power for the majority of the quarter, which was partially restored in late December, in addition to existing constraints relating to Russia’s invasion. As of the date of this release, the Group continues to produce iron ore pellets using one pelletiser line (out of a total of four)… Full year pellet production of 6.1 million tonnes in 2022, down 46% year on year, reflecting operational and logistical constraints throughout 2022 due to the war in Ukraine (2021: 11.2 million tonnes produced).

Trading update, 11th January 2023

I’ve chosen Ferrexpo this week to highlight the effectiveness of the value investing approach I pursue and specifically the difference between a large-cap stock going through a temporary period of unpopularity such as ExxonMobil in 2020 when the price of oil went to -$37 a barrel and Ferrexpo. Both are commodity stocks. But both face or have faced, different problems. The prolonged nature of Russia’s invasion means that Ferrexpo’s problems are not temporary therefore Ferrexpo is not ‘investment grade’, even though it has a PE Ratio of less than 5, iron ore demand (prices) has been increasing, and its earnings have been growing steadily over the past few years. When the conflict in Ukraine looks likely to end is when to revisit Ferrexpo and its prospects for a brighter future.

Is it time to go all-in now that inflation is easing?

by

Egg prices exploded 60% higher last year

Traders: ‘I’m going all-in to the market now that CPI (inflation) is declining. But no. We’re still fearful.

Banks: ‘Nope. A recession is coming. A mild one. But a recession nonetheless. Plus we’ve raised our credit loss provision substantially… because… well… the economy is screwed for 2023′

The Fed’s inflation fight

People like Jim Quinn are shelling out upwards of $6 and $7 for a dozen eggs. Quinn has run daytime eatery The Hungry Monkey Café in Newport, Rhode Island, with his wife, Kate, since 2009. As a breakfast and lunch joint, it leans heavily on eggs for the majority of dishes on its menu — and especially for the 15-egg King Kong omelet novelty food challenge at the restaurant. The cost of food is still hard to swallow, but the latest Consumer Price Index shows that those price increases — by and large — are at least growing at slower rates.

We’ve seen a decline in some measures of inflation but we have a lot more work to do, so I expect the [Federal Open Market Committee] will continue raising interest rates to tighten monetary policy

Michelle Bowman, Federal Reserve Governor

Bowman continues: “I expect that once we achieve a sufficiently restrictive federal funds rate, it will need to remain at that level for some time in order to restore price stability, which will in turn help to create conditions that support a sustainably strong labor market”

The business of banking

Recent fourth quarter results from the large-cap banks:

  • Goldman Sachs: earnings of $3.32 per share vs. $5.48 estimate
  • JP Morgan: earnings of $3.57 per share vs. $3.07 estimate
  • Citigroup: earnings of $1.10 a share vs. $1.14 estimate
  • Bank of America: earnings of 85 cents per share vs. 77 estimate
  • Morgan Stanley: earnings of $1.26 per share vs. $1.19
  • Wells Fargo: Earnings: 67 cents a share vs 66 estimate

Credit losses and wage inflation are to blame for Goldman Sachs’ hit to earnings. Here’s a free business tip if you run a bank: do not offer excessive salaries to ‘recruit and maintain talent’, shareholders will not be happy. Citigroup have the lowest PE ratio from this group at 7.07 at the time of publication.

Once a long term loser, always a long term loser

We need to talk about long-term FTSE 100 losers. Just one actually. Ocado (LSE: OCDO).

And to do that we need to take a quick look at the numbers.

*Checks numbers*.

Oh dear.

Is it me or is the only positive aspect of the Ocado business the balance sheet? Speaking of which:

Following our recent successful financing, we now have a strong financial position and ample liquidity to fund the requirements of our existing and expected customer commitments into the mid-term. No additional Group financing will be needed as the business becomes cash flow positive

Tim Steiner, Chief Executive Officer of Ocado Group

Unfortunatly, Steiner uses cash flow v free cash flow because free cash flow has been non-existent at Ocado, oh, for its entire operating history except for 2018. Also cashflow has been positive in the past yet for most of its operating history, Ocado has posted losses.

Ocado isn’t even on my watchlist.

Q3 2022 performance report

by

The Q3 2022 performance report for the Wealth Accumulated Portfolio is compiled from broker quarterly statements and publicly available information of the quarterly performance of the S&P 500.

Results for the Wealth Accumulated portfolio for the third quarter of 2022 are as follows:

  • The Wealth Accumulated Portfolio: -1.04%
  • S&P 500 -5.28%

The Wealth Accumulated performance is net of expenses.

Towards the end of 2021, just after Christmas, all portfolio positions were liquidated.

Throughout most of 2022, the portfolio has held cash which has been an unfortunate but necessary position to be in.

News flows became increasingly negative throughout this year and journalists have not stopped sharing their gloomy outlook for global financial markets.

Having dry powder in the form of cash is one thing, actually holding on for so long with it is extremely trying, especially as bargains are more prevalent each week.

Clearly, stocks have had a very poor year which has led to the Wealth Accumulated portfolio doing better than the stock market averages due its large cash position.

When the time comes, the Wealth Accumulated portfolio will be purchasing a combination of index funds and carefully selected undervalued large caps.

Outlook

My general view of global large-cap stocks – the type in which I invest – is that they are at fair value.

The PE ratio of the S&P 500, my preferred approximation of market value, is 19.07 as of the date of this post.

Before the massive liquidity events, that started in the 1980s and were exacerbated in 2008 and 2020, a PE ratio of 20 for the S&P 500 would have signaled the top of the market.

The current economic environment means we factor in central bank and government interventions.

Policymakers have artificially inflated the prices of assets leading to inflation and crises in the global economy.

Their extremely small set of tools means that it is almost certain they will be forced to use inflation-causing tools again, most likely when a financial crash is imminent, or is already underway.

Right now I believe stock prices will be heading lower until well into 2023.

This belief is not a prediction or some type of forecast.

The Federal Reserve’s commitment to fighting inflation has been more robust than in recent years and interest rates are its only current weapon of choice.

Historically, investors despise interest rates and dump assets as a show of force against the rising cost of credit.

But it does mean the market is getting cheaper every day.

So far in 2022 stock prices have declined by -22.83% as measured by the S&P 500.

The US is already in a recession despite policymakers trying to redefine what a recession is and at the same time, the Fed is tightening the money supply.

Inflation has plateaued at historical highs and we are yet to see any sign that the war in Ukraine will end any time soon.

My policy of stock purchases is firmly rooted in the value investing school, with an emphasis on buying them at a discount to their intrinsic value.

Under these conditions, I do not see any advantage in deploying capital into stocks at this time and possibly into 2023.

Q3 2022 performance report: what happened in the third quarter?

The portfolio added one FTSE 100 position in the third quarter of 2022 after a disastrous news report citing a potential lawsuit that could result in a hefty fine for the business.

It is a well-established stalwart of the FTSE 100 and remains in the top 10 largest companies by market cap on the London Stock Exchange.

At the time of purchase in mid-August, the dividend yield stood at 6.54% and price to earnings 11.09.

They have since paid a dividend and the share price has declined slightly since the initial purchase.

The price decline is the reason for the portfolio’s negative returns of -1.04% this quarter.

I’m not overly concerned about short-term price fluctuations, especially from such a large well-established company that pays a handsome dividend.

The purchase represents 10% of the portfolio whilst cash is at a staggering 90%.

My main concern is the continuing fall in general prices which has forced me to maintain a large cash position.

The staying invested v inflation eating away at the value of cash debate is of no concern when losses from declining stock prices also devalue portfolios.

A double-whammy if you will. I’d rather a single-whammy.

In the current environment, the only sensible course of action is to hold cash whilst policymakers work to bring down inflation an unintended consequence of which is to wash up bargains stocks.

Conclusion

Hopefully, I’ve been able to communicate more about the Wealth Accumulated investment approach in this inaugural quarterly report without reference to specific stocks.

Don’t forget to subscribe to the newsletter to get notified of any new posts to this blog.