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On the 4th of May, asset management firm Berkshire Hathaway Inc announced in the course of its first quarter earnings release that its biggest bet – Apple Inc (ticker: AAPL) – was worth $135.4 billion, implying that the former held around 790 million shares of the latter. This meant that the “Oracle of Omaha” (as Berkshire Hathaway principal Warren Buffett is often referred to as) has authorized the disposal of around 116 million shares or 13% of its total stake in Apple.
Most “Buffettologists” would recognize that Berkshire Hathaway’s investment style isn’t known to be tactical; holding “strong for long” is the underlying message of their methodology. Apple is certainly one such example and for good reason: unlike fellow “Magnificent Seven” constituent Tesla Inc, Apple has only declined a little under 0.2% in the Year Till Date (YTD) despite signs of sales slowdown in major market China and signs of stagnation elsewhere. Furthermore, this is the second consecutive quarter wherein the company’s Apple bet was cut: in the last quarter, around 1% of its held stake was disposed of.
While Warren Buffett did praise the performance of Apple in the course of the earnings release and seemingly offered up higher tax payments as the reason, the real reason possibly is the economic reality as faced by the ordinary American.
Why Berkshire’s Investments MatterOn a cost basis, the value of the company’s investment in US, foreign and corporate debt as well as loans/receivables is nearly half that of its revenues.
Historically (or at least from 2020 till 2023), the value of the company’s investments in securities (outside of Kraft Heinz or Occidental) have run close to or slightly above par with that of its revenues. As of Q1, of this is 3.74 times its revenue. After the stake offload, approximately 75% of the aggregate fair value of the company’s equity investments was concentrated in five companies as of the end of March:
Apple Inc.: $135.4 billion
Bank of America Corporation: $34.8 billion
American Express: $39.2 billion
The Coca-Cola Company: $24.5 billion
Chevron Corporation: $19.4 billion
As of the end of December 2023, these 5 had accounted for 79%.
On a YoY basis across full years, the cost basis valuation of the company’s fixed income/debt instruments have seen some mild swings (outside of 2022 when the company made a massive shift towards U.S. debt).
Source: Company Financials; Leverage Shares analysis
In the most recent quarter, the cost basis valuation of these investments is running well above par. The continued commitment to fixed-income instruments bodes well towards a prudent approach to guaranteed cash payments. When it comes to equities, this is an entirely different matter.
These investments are key to elevating the valuation of the company’s stock, and the company’s methodology towards the selection of assets has historically been predicated on the underlying companies’ ubiquity in consumption. However, over the past year and more, stock valuations have become increasingly distorted and volatile. The fundamental reason behind a “flight of capital” to a select number of tickers and increasingly shrinking market breadth is the macroeconomic picture that’s been brewing for several years now.
Economic Data: Averages and SpecificsAs of March, the U.S. Bureau of Economic Analysis estimates1 that personal income increased by 0.5% on a monthly basis. While Disposable Personal Income (DPI) — personal income less personal current taxes — increased by 0.5%, Personal Outlays — the sum of personal consumption expenditures (PCE), personal interest payments, and personal current transfer payments — increased by 0.9% and consumer spending by 0.8%.
However, it is evident that personal savings as a percentage of disposal income has been in a downtrend throughout the current year.
On the day before Berkshire Hathaway’s earnings release, the U.S. Bureau of Labor Statistics reported that nonfarm payrolls in April2 rose by 175,000 versus consensus expectations of 243,000. Overall, nonfarm payroll trends have cooled off from the larger magnitudes of change experienced through much of 2021 and 2022.
Source: U.S. Bureau of Labor Statistics; Leverage Shares analysis
The higher magnitudes in those years could be attributed to workforce numbers bouncing back from the massive lows experienced in April and May of 2020 but, in recent times, the numbers have seen relatively heavy revisions a month or two after the initial release.
Given that the numbers are still positive, it isn’t unreasonable to expect that greater workforce participation (and incomes) would mean that credit would be paring down or stabilizing. However, this is not so. As per the Federal Reserve, outstanding consumer credit has been steadily rising3 since 2021 with no significant sustained downtrend.
Source: U.S. Federal Reserve; Leverage Shares analysis
As of February (the latest month with available revised numbers), outstanding revolving consumer credit stood at $1.338 trillion – a 22.5% increase from 2019, i.e. pre-pandemic, levels.
The automobile could be argued as being the cornerstone of the American way of life and the United States is home to the largest fleet of automobiles on the road in the world. In the auto loans category, the Federal Reserve Bank of New York estimates4 that the total balance of auto loans have seen virtually no significant downtrend since the Great Financial Crisis. The latest release by the New York Fed (as of Q4 2023) shows auto loan balances at $1.607 trillion, a 103% increase from 2008.
Source: Federal Reserve Bank of New York; Leverage Shares analysis
The New York Fed also warned that delinquencies were rising in virtually every loan category except student loans. This is being felt in long-term equity-building loans such as real estate as well. As per the Mortgage Bankers Association, 2023 ended with three consecutive quarters of rising delinquencies relative to total loans.
Source: Mortgage Bankers Association; Leverage Shares analysis
Absent a heavy subprime component that led to the highs of 2009 through 2010 and the massive hit imputed by the pandemic on incomes, the fact that these three quarters came after a 15-year low in delinquencies indicate that this is a burgeoning trend.
The U.S. Bureau of Labor Statistics also indicated5 that the total number of job openings in the private sector in March was 12.2% lower than in the past year and down 4.5% relative to the start of the year. Meanwhile, government job openings have had strong upticks particularly in the state and local sector: government jobs excluding education were up 12.8% in the year till date while education jobs were up 23.8%.
With greater government spending comes the need to bolster up government income. The preferred means of doing so in the U.S. has traditionally been the issuance of debt. One key holder of government debt has been, of course, the Federal Reserve itself: as of two years ago, the Fed held nearly $9 trillion of government bonds and mortgage-backed securities in its balance sheet. Since then, the Federal Reserve pursued a course of “Quantitative Tightening” wherein a certain amount of debt instruments would be allowed to mature without reinvesting the proceeds to the tune of a maximum $95 billion per month. After two years, the Fed holds $7.4 trillion in debt.
Over the past two years, however, the government has shown no signs of easing up on debt issuances. While the purchase of government debt by the Fed might have imparted a semblance of credibility to these actions in some quarters, the overall appetite for government debt had been waning until rate hikes commenced and imparted some upward momentum. On the 1st of May, the Federal Reserve made an interesting commitment: from June onwards, the maximum reduction limit was reduced to $60 billion. Given that ongoing debt issuances are projected to rise despite high rates adding a higher debt burden on the government’s books in the future, there might be an upper limit on government debt regardless of where said rates are. Thus, the Federal Reserve is somewhat re-committing to propping up the debt market.
Sector Redistribution Imminent?If debt issuances are unlikely to find strong sustained demand from the market place, the other recourse for revenues is taxation. While it’s uncertain if the numerous tax loopholes that help pare down corporations’ taxable income will be closed, it is almost certain that tax rates might be hiked for individual citizens. The ostensible reason behind the Apple bet reduction seemingly offered by the “Oracle of Omaha” was that the proceeds would help in shoring up tax obligations. If taxes were indeed the driving factor behind the stake sale and not a change in perspective, then standard investment philosophy would have advocated a proportionate reduction in stake across the portfolio.
While higher income from investments including more effective insurance underwriting by Geico saw Q1’s operating profit6 rise 39% Year-on-Year, the company ploughed at least some its proceeds into purchasing $2.6 billion into stock repurchases, with some indications that it will continue. Given that cash is expected to top $200 billion by the end of June – of which only $11.2 billion is after-tax gains from the Apple stake sale – it can be assumed that the tax bill isn’t the (only) reason.
The comment on taxes pared with the Apple selloff – a company heavily dependent on consumption – indicates that the play in motion is driven by macroeconomics. If so, the “Oracle” isn’t alone: on the 2nd of May, Citi’s chief U.S. economist Andrew Hollenhorst asserted7 that, rate cuts or not, the U.S. economy is headed for a “hard landing” on the basis of a policy cycle that will see stubborn inflation followed by a weakening of the labour market. Despite upbeat payroll data, he pointed out that the number of hours worked and full-time jobs available were dropping while several surveys indicated that jobs were harder to find and employers were less eager to hire. In February, Mr. Hollenhorst estimated that a recession will break out sometime in the middle of the year. In the present, he continues to assert that the financial market expects a hard landing more so than any other event.
If there’s a hard landing (or “recession”) imminent, the most favoured plays in the course of that regime will be financials and energy – both sectors that Berkshire Hathaway has long been invested in. It’s unlikely that the company will just hold hundreds of billions in cash for months on end, tax bill or not.
All in all, Q2 results will make for an interesting read.
Footnotes:
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
