Inside this Issue:
- Bonds Away: The Roar of Rising Rates
- Stocks Knocked: And the Techs Decked
- Covid: Half a Million Americans Dead
- Buffett’s Brain: Letter from a Leader
- Yellen and Powell: The Enemy Now: Unemployment, not Inflation
- Coinbase: Google of the Cryptoeconomy?
- The Battle of Birmingham: Amazon Fights the Union
- Ghosts in the Kitchen: The Restaurant Sector’s Hottest Trend
- Looking Back: How Little Google Became Big Google
- Debate: Trade More with China? Or Less?
- And This Week’s Featured Place: North Dakota, Oil Boom and Bust
Quote of the Week
“The cryptoeconomy is just getting started. It is not intended to replace the traditional economy, but instead be a complement to it, much like email was to paper mail.”
– Coinbase CEO Brian Armstrong
Are you a bond trader? Take a deep breath. It was a wild week on Wall Street, headlined by another movement upward in interest rates. Investors, apparently, aren’t satisfied with lending to Uncle Sam at the rock-bottom rates prevailing at the end of 2020. Since the start of the year, they’ve been bidding the rates up. The Treasury, meanwhile, is increasing its borrowing to finance Covid relief measures—Congress is now close to passing another $1.9 trillion in spending. The labor market needs more help, spending advocates say. And as long as the human resources of the country are grossly underutilized, there won’t be inflation.
Maybe, but inflation—or perhaps it’s growing skepticism about the Fed’s commitment to easy money—does concern those buyers of bonds. On Thursday, their waning demand forced the Treasury to sell ten-years (the most popular kind), offering a yield of 1.54%. At the start of this year, it could get away with offering just 0.93%. A year ago, when Covid first hit, yields fell to 0.54%. Will rising Treasury rates, now rippling into the mortgage market, cool demand for housing? There’s no sector of the economy more important.
The housing market remains robust for now, as does the stock market. But the frenzied run-up in stocks since last spring shows some signs of cooling. Stock prices dropped last week. Tech stocks dropped even more. Still, the stock market’s total value remains near record highs. And while it’s loaded with companies losing money, many of America’s largest and most influential firms enjoyed record revenues and earnings during 2020.
But 2021? If people revive their spending on travel and dining out and attending live events, will they reduce their spending on the boom products of 2020, i.e., computers, home furnishings, video games, etc.? That will probably be the case, at least to some extent. But as the latest January data for personal incomes and consumer spending make clear, the $900b December stimulus is turbocharging demand. The looming $1.9 trillion encore presages further gains.
As the housing sector contemplates the impact of rising mortgage rates, the energy sector is debating the proper response to what happened in Texas. In the auto sector, a shortage of semiconductors is turning into an SUV-sized problem, prompting Biden administration action on securing future supplies of economically vital inputs. Don’t forget about all the batteries we’ll need for electric vehicles, says the carmaker Ford among others. The retailer Costco is raising wages. The retailer Amazon faces an Alabama unionization drive. Debt-heavy AT&T has a new plan for its video business. All companies are evaluating the future of remote work. Several are merging. Some like Coinbase are laying the groundwork for a cryptoeconomy. Others have yet to report earnings—the retailers Costco, Target, Kroger, Dollar Tree and Ross all go this week.
So does Maryland-based Novavax, which appears to have yet another effective vaccine to stop Covid. Johnson & Johnson’s one-shot vaccine is now authorized for use. But the war isn’t yet won. On Friday, Feb. 26th, roughly 2,000 Americans died of Covid. That’s better than the 4,000 that died on Jan. 26th but still too high to restore normality. Total U.S. deaths now exceed 510,000.
Home Depot: It’s a time when the home is at the center of everyone’s lives. No surprise then, that it’s a good time for a retailer with the word “home” right in its name. Atlanta-based Home Depot, sure enough, is seeing an incredible surge in sales. For its fiscal quarter that covered November, December and January, sales rose an astonishing 25% y/y, to $32b. For the 12 months through January, sales growth was 20%, reaching $132b. Lowe’s a Charlotte-based rival, saw similar trends (its revenue for the 12 months through January was about $90b). Both companies benefitted from a strong housing market, rising disposable incomes, a huge jump in online ordering and the shift of many activities into the home. As Lowe’s explained, the home became four things during the pandemic: a residence, a school, an office and the primary location for recreation and entertainment. But how much does this change when the pandemic subsides? As people start spending their money on travel and outdoor dining again, will they reduce their home improvement spending? For now, both Home Depot and Lowe’s say demand remains strong, boosted in early 2021 by Washington’s $900b stimulus passed in December. If Congress crosses the line on adding another $1.9 trillion, home improvement spending could get another lift, coinciding with the busy spring home-buying season. Prices are rising too, however, for home materials like lumber. Both Home Depot and Lowe’s cater to two distinct sets of customers: professionals and non-professionals, the latter including contractors, property managers, plumbers, electricians and the like.
Berkshire Hathaway: The oracle of Omaha has spoken. As he’s done every February since 1977, Warren Buffet penned his letter to the shareholders of Berkshire Hathaway, America’s sixth-largest company by revenues. It was hardly a banner year for Berkshire. In 2020, it produced investment returns of just 2%, compared to 18% for the broader stock market (as measured by the S&P 500 index). Still, it posted a $43b accounting profit and retains its record as one of the most successful companies in American history. It’s an unusual company. At its heart is property and casualty insurance, including the Geico brand made famous by that little green lizard. Buffett’s original brainstorm so to speak, was the notion of taking people’s insurance premiums—cost-free money like a bank collects deposits—and using this “float” to invest in other companies. There’s risk in insurance of course, but Berkshire is a master of the craft. In the meantime, all that insurance premium money has made Berkshire a 12% owner of Bank of America, a 19% owner of American Express, a 9% owner of Coca-Cola… those are just a few examples. Most importantly though, in terms of value, are three businesses aside from its insurance activity: 1) the railway BNSF, America’s largest by freight volume, 2) Berkshire Hathaway Energy (BHE) and 3) Apple. In Apple’s case, it only owns a 5% stake. But it’s a valuable stake. It has 100% control of BNSF and BHE. In his letter, Buffett admitted a mistake in buying Precision Castparts in 2016—turned out he paid too much. Unmentioned was a retreat from the airline industry after Covid decimated the sector. Last year, Berkshire used a lot of its money to buy back its own stock; it didn’t execute any major takeovers. It certainly didn’t buy any Bitcoin, which Buffett considers a speculative asset. His youthful colleague Charlie Munger added skepticism about SPACs: “The investment banking profession will sell shit as long as shit can be sold.” Buffett, though, is always an optimist when it comes to the U.S. economy and its potential to grow. This potential, he adds, isn’t confident to just coastal cities; his letter notes of the “many miracles occurring in Middle America.” To be clear though, he likes stocks, not bonds, the chief investment of other insurance companies. He points to the bleakness of bond investing as interest rates continuously fall. What’s next for Berkshire? The next generation of leadership lies in waiting, though they might be waiting a while: Buffett is only 90, and Munger just 96.
Union Pacific is America’s largest publicly traded railroad, with nearly $20b in revenue last year. As it happens, all U.S. railroads were strongly profitable in 2020, as they were in 2019—Union Pacific’s operating margin was 40%. Revenues did shrink by a tenth, however, due to pandemic-related disruptions, most notably around April. In the U.S., trucks carry 82% of all freight revenue, according to Union Pacific’s rival CSX. Trains just carry 8%. But that understates their importance to the economy, even today. For much of American history, starting around the 1840s, railroads dominated interstate commerce, with a revolutionary impact on the movement of agricultural goods, consumer goods, natural resources, information and people. They gave rise to many of the country’s largest cities, including Chicago and Atlanta. Railroads themselves were among the country’s largest corporations—the Philadelphia-based Pennsylvania Railroad was for many years America’s largest corporation. Automobiles and later airplanes would eventually reduce the importance of trains, leading to railway bankruptcies and consolidation. But today, five major U.S. rail companies, competing with two major lines from Canada, earn strong profits carrying things like farm products, oil, chemicals, plastics, steel and cement. One product that Union Pacific said was booming last quarter: lumber from the Pacific Northwest, owing to the housing boom. On the other hand, shipments of coal are on a structurally downward trend as the country adopts cleaner forms of energy. Shipments of autos and auto parts, which Union Pacific classifies as “premium” freight, are momentarily affected by the semiconductor shortage. Also considered premium are intermodal shipments in which railways carry containers transferred from ships and trucks. As a railroad covering the western half of the U.S., Union Pacific’s largest intermodal terminals are in Los Angeles, San Francisco, Salt Lake City and Chicago. For non-intermodal freight, Texas is one of its largest markets. The company is based in Warren Buffet’s hometown of Omaha.
Nvidia is less of a household name than Google, Apple or Facebook. But it’s likewise an influential Silicon Valley tech company that earned big profits in 2020. With roughly $11b in annual revenues, Nvidia is much smaller than its more recognizable Valley neighbors. But its influence is large and growing. The company began life making computer chips for video game graphics. And even today, the fast-growing gaming sector generates half of its revenues. But its computer processing technology is now involved with everything from artificial intelligence (AI) to cloud computing to Bitcoin mining to precision agriculture to autonomous driving. In a major strategic move, Nvidia last fall agreed to buy Britain’s ARM, the leading producer of mobile computing processors. The deal, executives say, will create the premier computing company for the age of AI. But it needs regulatory approval, something several key rivals—Google, Microsoft and Qualcomm among them—vehemently oppose. Nvidia sees the age of AI defined by trillions of devices connected to the internet. It won’t just be an internet of people anymore, but an internet of things.
Sturm, Ruger, and Co., a gun manufacturer, saw revenues grow 39% in 2020, to reach their highest total since the Obama administration. America’s firearms industry, including manufacturers and retailers, had a busy year, with gun sales nationwide rising 40%, according to USA Today. Another statistic, courtesy of The Oregonian: The U.S. conducted 40m gun background checks in 2020, compared to 23m in 2015. The social unrest prevalent throughout 2020 clearly had something to do with the spike.
Tweet of the Week
“Over the last 3 decades, the #FAMGA tech giants — Facebook, Amazon, Microsoft, Google, and Apple — have gobbled up more than 800 cos.”
-CB Insights, on the penchant for acquisitions among the tech giants of Silicon Valley and Seattle