Berkshire Hathaway in 10-Q provides update on fair value of top investments
- As of March 31, 2017: Approximately 65% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company (AXP) - $12.0 billion, Apple Inc. (AAPL) - $19.2 billion, The Coca-Cola Company (KO) - $17.0 billion, International Business Machines Corporation (IBM) - $11.2 billion and Wells Fargo & Company (WFC) - $27.8 billion.
- As of December 31, 2016: Approximately 62% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company (AXP) - $11.2 billion, Apple Inc. (AAPL) - $7.1 billion, The Coca-Cola Company (KO) - $16.6 billion, IBM (IBM) - $13.5 billion and Wells Fargo & Company (WFC) - $27.6 billion
Full 10Q attached
Volkswagen plans to ‘leapfrog’ Tesla in electric car race
VW brand aims to sell 1m battery driven vehicles by 2025
The Volkswagen car brand said it is confident it will “leapfrog” the competition and become a leader in electric cars by 2025 as it redirects its attention to battery-powered vehicles and emerges from the 2015 diesel emissions scandal.
The VW brand, by far the biggest company in the 12-brand Volkswagen Group, said it would target 1m electric car sales by 2025.
This would put it on a clear path to clash with Tesla, the US electric carmaker that sold fewer than 80,000 units last year but has pledged to build 1m a year by 2020.
“Anything Tesla can do, we can surpass,” declared Herbert Diess, head of the VW brand at its Wolfsburg headquarters.
Moreover, he said, what Tesla will achieve in the premium market, VW will achieve in the volume market. “We are confident that in this new world we will become a market leader,” he added.
The electric ambitions of VW and Tesla form one of the big debates in the car world: is it easier for a start-up with proven technology to scale up, or for a traditional carmaker with scale to transform its operations?
Mr Diess said VW will have “leapfrogging cost advantages” thanks a wider rollout of its “MQB” platform, or car-building architecture, which helps the different VW brands to share parts, technology and assembly sequences.
“[Tesla] is a competitor we take seriously. Tesla comes from a high-priced segment, however they are moving down,” Mr Diess said, referring to the $35,000 Model 3, which enters production this summer. “It’s our ambition, with our new architecture, to stop them there, to rein them in.”
Mr Diess was speaking at what VW called its “first” annual press conference — an odd phrasing for a company that is 80 years old. What it signified is that Mr Diess, a cost-cutting executive poached from BMW in July 2015, is drawing a clear line between the VW brand and the VW Group. The line between them was often hazy under Martin Winterkorn, the former chief executive who led both until 2015.
To enhance the value of the VW brand, it has started to separate certain group-level activities from the brand’s balance sheet. Under the new structure, 2016 operating profit was €1.6bn, instead of €1.9bn as reported, but margins were 2.1 per cent rather than 1.8 per cent.
The challenge for the VW brand’s transition towards electric mobility is to ramp up investments in both electric and combustion engine technology, all the while cutting costs overall.
“We foresee substantial financial burdens looming,” said Arno Antlitz, chief financial officer for the brand. However, he said the increased capital spending would be “overcompensated” by savings from the “future pact”, a deal reached last November to cut €3.7bn in costs and reduce headcount by 30,000 globally by 2020.
Mr Diess said VW would become a leader in three stages: from now until 2020, the focus is on improving profitability by cutting costs, enhancing productivity by 25 per cent, and achieving operating margins of at least 4 per cent. The second stage, until 2025, is to take the lead in electric, connected cars, while boosting margins to 6 per cent. After 2025, VW will double down on mobility solutions.
Central to VW’s plan is a “substantial reduction of complexity in the new line-up,” said Mr Diess. If VW can achieve that it will be on a solid foundation to sell electric cars at the price of today’s diesel models, for profit. “The entire electric fleet,” he added, “is to be profitable from the very beginning.”
The global economy has continued to expand at well above its trend growth rate since the beginning of 2017, but there have been some early signs of a slackening in recent weeks. According to the latest monthly results from the Fulcrum nowcasts (attached here), global growth is now running at 4.1 per cent (at PPP exchange rates), which is about half a percentage point lower than a month ago.
This “slowdown”, which has been driven by the US and China, is well within the normal range of monthly fluctuations in the global nowcast, and it may be nothing more than a temporary blip. There are some legitimate reasons for concern about the slowdown in China, which seems to be connected to tighter credit polices. Fortunately, however, the Chinese economy seems in better shape to absorb this tightening than it was in 2013-15.
Since the American Presidential election in November 2016, much of the attention of investors has been focused on the US economy, which is usually seen as the litmus test for the “global reflation theme”. The nowcasts have identified a strong surge in US growth, starting in September 2016 and peaking at over 4 per cent in March 2017.
Although the 2017 Q1 official GDP data showed an annualised growth rate of only 0.7 per cent, it is clear that the problem of “residual seasonality” in the data has emerged again this year, and the Federal Reserve has commented that the slowdown will prove “transitory”. GDP growth in 2017 Q2 is widely predicted to approach 4 per cent – close to our recent nowcasts – as seasonal issues correct themselves in the official data.
Admittedly, the US nowcast has weakened in April, though it still stands at 3.2 per cent, compared to a trend growth rate of 2.1 per cent. It is too early to say whether this deceleration represents anything very significant. The nowcast models anticipated a gradual return towards trend growth in coming months, though the drop in April has been slightly larger than statistically expected. The chances of a self-sustaining break-out to above trend growth without additional policy support may have diminished, but should not be entirely written off yet.
Offsetting these doubts about the strength of US growth, the nowcasts for the Eurozone economies have continued to move higher across the board. The bloc as a whole is now estimated to be growing at just under 3 per cent, the best results for several years. In the advanced economies as a whole, activity growth is estimated to be running at 2.7 per cent, compared to a trend rate of 1.7 per cent [1].
Despite the widespread focus on the US economy, the recovery in global growth since the low point was reached in March 2016 has mainly come from elsewhere (see table). According to the nowcasts, the global growth rate has risen by 1.91 percentage points since then, and only 0.26 points of that overall improvement has come from the US. The rest has come mainly from the emerging economies, which have contributed 1.30 points of the total gain.
Within the emerging economies, the Chinese contribution of 0.44 points stemmed from an unexpected acceleration to above-target growth in the second half of last year, aided by a substantial injection from public investment, a 10 per cent depreciation in the real exchange rate, and the lagged effects of a huge surge in credit growth.
However, it seems that activity growth in China has now lost some momentum:
The Chinese Credit Cycle
Until recently, the overwhelming consensus among investors has been that the Chinese authorities would not tolerate any serious interruption in GDP growth until after the leadership transition in the 19th Party Congress in November. Furthermore, compared to the slowdown in 2013-15, external demand, private investment and the housing market seem in better shape to withstand any tightening in credit policy.
This comfortable belief has now been challenged by weaker activity data, and by signs that the authorities are more worried about excessive credit growth than had earlier seemed likely. Last week, these concerns were a major factor behind the sharp declines in commodity prices, which had been expected to firm as global growth accelerated this year. Chinese equity prices have also dropped by almost 6 per cent in the past month.
The current bout of tightening started in December. Since then, maturity mismatches, extended rollover risks and opaque collateral arrangements have caused periodic bouts of severe stress in the overnight SHIBOR market.
The authorities have so far been able to address bankruptcy risks during these episodes by directing liquidity from the regulated large banks towards the unregulated entities that have been experiencing liquidity problems. Nevertheless, the tightening has caused significant increases in short and long term interest rates, reversing the declines in rates seen during the period of aggressive monetary easing in 2015/16:
This monetary and regulatory tightening is having the desired effect on broad credit growth, which has fallen from an annual rate of 25 per cent in early 2016 to only 15 per cent now, as the shadow banking and wealth management sectors have been squeezed:
Does this represent a major shift in the policy regime? Recent nervervousness has been exacerbated by reports that President Xi Jinping has called for greater “financial security”, repeating the concerns about excessive leverage expressed by an “authoritative person” (probably the President himself) a year ago. The fear, expressed strongly by the IMF in its Global Financial Stability Report, is that total credit in the economy is already at levels that have always caused financial crises in other economies, and delay will only make the eventual deleveraging more difficult.
The authorities’ objective seems to be to rein in surging leverage in the shadow banking sector through a combination of tougher regulation and tighter liquidity provision to that sector, without causing wider systemic risks to the financial sector. They also hope to be able to squeeze the growth of credit between financial entities without restricting credit provision for legitimate economic expansion.
This is not the first time that the PBOC has attempted to slow down the growth of credit by a combination of tighter liquidity and more stringent regulation of financial institutions and this latest episode will probably mean that the period of unexpectedly strong Chinese activity growth, which started in 2016 Q1, is now over. This may take some of the buoyancy out of the global reflation theme for a while, especially if tighter regulation of Chinese wealth management products reduces the speculative demand for commodities.
In the past, however, China has not been willing to persist with credit tightening whenever it started to threaten the GDP growth target, which is currently set at 6.5 per cent for 2017. That still seems to be their strategy – at least until after the People’s Congress in November.
Goldman Sachs wins largest concessions on Volcker rule
Bank gets permission to hold on to $6.2bn of illiquid asset
Goldman Sachs has emerged as a big beneficiary from US regulators’ decision to grant banks more time to comply with parts of the Volcker rule, which was aimed at forcing them to wind down risky activities.
While best known for its clampdown on banks’ ability to trade with their own money, the rule — part of the Dodd-Frank financial overhaul instituted after the financial crisis — also restricted them from owning hedge funds and private equity assets.
Several big banks have disclosed in their most recent quarterly filings that the Federal Reserve has granted them extra time to sell “illiquid” investments, and none has disclosed greater relief than Goldman.
A filing this week confirmed it had received an extension for “substantially all” of its investments in $6.2bn worth of so-called legacy covered funds — $4.5bn worth of private equity funds, as well as credit, real estate and hedge funds.
For critics, the regulatory concession is the latest example that Volcker has been watered down. Banking lobbyists, meanwhile, are trying to persuade the US government to reconsider the rule.
“Banks have been gaming the Volcker rule deadlines from the beginning,” said Dennis Kelleher of the advocacy group Better Markets. “There is now a multi-pronged attack by the biggest banks on Wall Street to kill the Volcker rule, this is just one of the prongs.”
Among other banks, Citi disclosed this week that it has also been granted its request for an extension, although its investments in the illiquid assets were much lower than Goldman at $416m.
Morgan Stanley has said it had asked for an extension of $1.9bn worth of illiquid funds but it has yet to say it has been granted the extra time. PNC Financial Services, the sixth-biggest US bank by assets, said earlier this year that it had been granted a five-year extension covering $300m worth of funds.
Lawyers and analysts said banks had long-term contractual commitments to some of their investments and could be forced into fire-sales if they were not given more time.
The Federal Reserve agreed in December to grant extensions. But each bank was required to make an individual application showing how the assets were illiquid and describe “specific efforts” to divest.
Kevin Petrasic, head of Financial Institutions at White & Case, said: “There certainly could be a perception that this is kicking the can down the road.
“But it’s important to remember that when Congress put the law in place the intent was ultimately to give banks sufficient time to dispose of illiquid assets without causing undue harm.”
David Fanger, a former New York Federal Reserve official who is now senior vice-president at the rating agency Moody’s, said that before the crisis Goldman was more focused than most of its peers on private equity sponsorship and alternative investment management.
Regulators will only give banks more time to dispose of such investments if they were made before 2014. Private equity or hedge fund investments made since then need to be “Volcker compliant”, subjecting them to restrictions including size caps.
Volcker compliance has been causing a regulatory headache for banks. Last month Deutsche Bank became the first big bank to be penalised for alleged violations of the rule.
The Fed said Deutsche had failed to adequately monitor whether its traders were dealing on behalf of clients, or putting the bank’s own money on the line.
Rolls-Royce shares gain on talk of Sunday newspaper story - reported rumour
06 MAY 2017
Rolls-Royce [LON:RR] shares gained 5% on Friday, 5 May, partly due to trader speculation that the FTSE-100 engineering company could be the subject of a report in a forthcoming Sunday newspaper, the Financial Times reported. The newspaper's market report section did not cite a source for the speculation.
As the gossip lacked details, speculation centred on previous chatter such as a break-up of Rolls-Royce or a merger with another UK company, according to the report.
Rolls-Royce’s share price gained 41.0p to 853.5p at the close of trading in London on Friday, giving the company a market capitalisation of GBP 15.70bn (EUR 18.51bn).
Aryzta poised to sell 49% shareholding in Picard - reported rumour
Aryzta [SIX:ARYN], [ISE:YZA] shares gained up to 6.8% in Zurich on Friday, 5 May on talk that the Swiss food company is poised to sell its 49% shareholding in the French frozen food supplier Picard, The Irish Independent reported. The newspaper’s markets section did not cite a source for the rumour.
As previously reported, Aryzta CEO Owen Killian confirmed in January that chairman Gary McGann will review the company’s 49% interest in Picard.
A spokesperson for Aryzta refused to comment on the matter on Friday, the item said.
Aryzta acquired its stake in Picard for EUR 446m (CHF 484m) in 2015.
Background:
A report from this news service on 17 March said Picard’s owners Lion Capital and Aryzta had hired the investment bank Rothschild to advise on a sale of the French company, citing four sources familiar with the situation for the information.
A report from this news service on 17 March said Picard’s owners Lion Capital and Aryzta had hired the investment bank Rothschild to advise on a sale of the French company, citing four sources familiar with the situation for the information.
Smurfit Kappa could spend up to EUR 1bn on acquisitions
Smurfit Kappa [LON:SKG] chief executive Tony Smurfit said the Irish packaging group could spend up to EUR 1bn (USD 1.10bn) on acquisitions, The Irish Times reported. The CEO, speaking on Friday, 5 May as Smurfit reported its 1Q17 results, said the company has leeway to spend EUR 1bn without substantially impacting its debt covenants.
There are lots of smaller potential deals and possibly a couple of bigger ones in the Americas and Europe, Smurfit added.
The Irish Independent also quoted Tony Smurfit, who said that the company is looking at a few more potential deals than was previously the case. Most of the deals are bolt-on acquisitions, although a couple of them could be “significant,” the CEO added.
Smurfit Kappa reported 1Q17 earnings before interest, tax, depreciation and amortisation of EUR 278m, a 1.1% decrease year-on-year.
As Crude Prices Firm, Oil Majors Rise to the Top
The integrated giants cut costs, sold off assets, and hunkered down when oil prices plunged. Now those efforts are bearing fruit.
Last week was a good one for European oil majors, as surprisingly strong earnings showed how some of the sector’s biggest players are now able to extract profits from relatively low crude-oil prices.
Britain’s BP (ticker: BP.UK), Anglo-Dutch company Royal Dutch Shell (RDSA.UK), and Norway’s Statoil (STO.Norway) all produced strong first-quarter results that could tempt back investors who have been scared off by a stalled oil-price recovery.
Concerns that inventories aren’t falling as fast as was hoped following last November’s production-cut agreement among OPEC nations has weighed on oil in recent days, pushing it down nearly 7% last week to around $48 a barrel.
Big integrated oil companies have had a tough couple of years since crude prices plunged in mid-2014 and caught them off guard. Most were forced into taking drastic action, slashing capital expenditures and operating costs, or selling less-profitable assets in a bid to streamline their businesses.
Their improved earnings in the first quarter suggest those efforts are bearing fruit.
Tim Gregory, a fund manager at Vermeer Investment Management, says market gains in recent months have left U.S. stocks looking fully valued, but he believes there are still investment opportunities to be had in Europe, particularly in the oil sector.
“That’s not to say we’re really bearish about the U.S., because we’re not,” he says. “We’re just finding some good value in other parts of the market.”
Gregory reckons investors were best able to leverage the 2016 oil price recovery—when it came back from lows of under $30 a barrel to more than $50—by investing in oil companies whose stocks suffered most from the previous 18-month slump.
“There was a feeling that if you believed oil prices would continue to recover, you needed to continue to be in these more-leveraged plays, and not in the defensive, more-integrated oil companies,” he says. With oil prices now below $50 a barrel, the focus is returning to the major players, particularly given their currently strong earnings performances.
“Companies like BP and Statoil and Shell are generating good cash flow from operations, which suggests their dividends are going to be stable if we stay in this oil-price corridor between the high $40s and the high-mid $50s,” Gregory says.
Of the three companies reporting last week, Gregory prefers Statoil. “In the first quarter they were well ahead of expectations, and their cash flow is showing a real improvement from the oil-price rebound,” he says.
Statoil has slashed its capital expenditures to an estimated $11 billion this year from $15 billion in 2015.
Its first-quarter net profit rose to $1.06 billion from $611 million a year earlier on higher prices, good operational performance, and organic production growth. The company ramped up its cost-saving efforts by some $1 billion and is now targeting $4.2 billion this year. Free cash flow for the quarter hit $3.56 billion, and Statoil reduced its ratio of debt to capital employed to 30% from 35.6% the year earlier.
Its stock has underperformed its bigger rivals’ over the past year, rising less than 4%, compared with Shell’s nearly 19% gain and BP’s 23%. All of them have declined by around 8% over the past three months, as hopes of a stronger oil-price recovery faded.
UBS analyst Jon Rigby is a Statoil fan. He has the stock at Buy with a 180 Norwegian kroner ($20.74) price target, a nearly 29% upside from current levels.
BP SWUNG TO A $1.45 BILLION net profit in the first quarter from a $538 million loss a year earlier. Apart from battling the sector’s structural problems, the company has also been absorbing the enormous costs stemming from the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. The cumulative pretax charges from that disaster are now close to $63 billion.
Barclays analyst Lydia Rainforth says BP is now her top pick in the European oil sector, with a £6.25 ($8.08) price target, giving it a 40% potential upside.
Shell put in a similarly impressive performance, with net profit jumping to $3.54 billion in the first quarter from $484 million a year earlier, and generating operating cash flow of $9.5 billion against the previous year’s relatively modest $661 million. The company’s capital investment plunged to $4.73 billion, from just under a whopping $59 billion in the first quarter of 2016. UBS’ Rigby has Shell at Buy with a £25 price target, giving it upside of nearly 24%.
EUROPEAN STOCKS WERE STEADY heading into the weekend, with the Stoxx Europe 600 Index up about 1% on the week. Investors remained sanguine about the final round of France’s presidential election on Sunday, with polls still giving pro–European Union centrist Emmanuel Macron a comfortable lead over the far-right anti-EU National Front candidate, Marine Le Pen.
Barrons weekend summary: positive on AMZN, NVS, TJX, ROST, BURL, GM, Ford
* Cover story: Barron's list of the best ETFs for income was chosen by Michael Arone of State Street Global Advisors (IEF, CWB, SRLN, ITE, FCVT), Jay Hatfield of Infrastructure Capital Management (PFF, SDY, AMLP, AMZA, PFFR), Putri Pascualy of Paamco (EMB, BKLN, SJNK, SHYG), and Fran Rodilosso of VanEck (FLOT, EMLC, FLRN, FLTR).
* Features: 1) Positive on AMZN: Shares could reach $1,000 by summer and $1,100 within a year, for a gain of close to 20%; By the end of the decade, the company's profits will balloon as revenues overwhelm costs and investments; 2) Positive on TJX, ROST, BURL: Companies have managed to avoid being trounced by AMZN because they are in the off-price clothing business, and they stock stores opportunistically; 3) Positive on NVS: "After a period of weak financial performance, Novartis could be poised for a multiyear run of earnings gains starting in 2018," driven by new drugs and a promising pipeline; 4) Positive on GM, F: Shares are among the cheapest on a price/earnings basis in the S&P 500, but their valuations could rise in a turnaround, while TSLA's may drop if its Model 3 doesn't live up to expectations.
* Tech Trader: With AAPL, Wall Street is betting on momentum heading toward the next iPhone release, part of trend in which investors focus on a theme or narrative instead of how well the business is doing.
* Trader: Jason Pride of Glenmede says the final healthcare bill won't likely resemble what came out of the House, which passed by only the narrowest of margins; The stock buyback trend seems to be slowing, with $146B from S&P 500 companies through April 27, down 15% from the same period a year ago; Positive on REGN: Two issues face the company's investors: its valuation is high, and and it has been trading in a range for much of the year.
* Profile: Andy Johnson, manager of the Neuberger Berman Strategic Income fund, looks for stable income in a low-yield environment (top 10 sectors: mortgage-backed securities, U.S. investment grade credit, U.S. high yield, non-agency RMBS, U.S. nominal Treasury, U.S. TIPS, bank loans, global Treasuries, emerging market).
* Small Caps: Positive on OCFC: In a sector that offers less value than in the past, OceanFirst is worth considering because of an attractive, low-cost deposit base, modest credit costs, and good profitability.
* Follow-Up: Positive on MHK: Shares of world's largest flooring company are down following second-quarter results, a pullback that offers a fresh opportunity to buy.
* European Trader: Large integrated oil majors such as BP, Royal Dutch Shell, and Statoil have had a tough few years, but strong Q1 results are a sign cost-cutting and streamlining efforts are bearing fruit.
* Asian Trader: The upcoming presidential election in South Korea could boost inexpensive stocks, based on the winner's policies toward China, North Korea, and local chaebols.
* Emerging Markets: Greece's recent deal with the IMF for debt relief suggest it could be time for investors to consider the country's equities again.
* Commodities: "A cocoa glut has driven prices down near the lowest levels in 10 years, but analysts think prices need to weaken further to win back chocolate lovers."
* Streetwise: Stephanie Pomboy of MacroMavens thinks it's remarkable that AMZN is moving into the grocery business, since groceries as a percentage of retail sales are declining-has Jeff Bezos "run out of frontiers to conquer, or is it a hedge against what's to come?"