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CWS Market Review – March 1, 2022
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The Finance War
I’ve been impressed by the way the world has come together to denounce Russia’s invasion of Ukraine. For our purposes, I’ve been especially impressed by the way the global financial markets can make an entire country’s finances persona non grata.
I can’t think of a similar event where a rogue country was virtually erased from any financial dealings. The results have been breathtaking. The Russian ruble has been reduced to rubble. The Russian currency plunged to less than one penny. At one point, the ruble got to 117 to the dollar. To give you another example, shares of Sberbank, Russia’s largest bank, had a rather unpleasant day on Monday.
The Russian Fed hiked interest rates to 20%. That’s the same level that our Fed had in 1981. Some Russian bonds are trading at 30 or 40 cents on the dollar. The Putin regime is nearly completely unable to pay its bills and some Russian banks were kicked off the SWIFT messaging system.
The Russian Fed has even temporarily banned western companies from exiting Russian investments. If you happen to be a Russian oligarch, I’d be very cautious about what happens to your yacht or bank account.
We’ve seen a reaction in our markets. On Tuesday, shares of JPMorgan (JPM) fell to a new 52-week low. Many other banks came under pressure. Conversely, defense stocks like Raytheon (RTX) and Lockheed Martin (LMT) both made new 52-week highs on Tuesday.
In the commodity pits, the price for wheat has been soaring. Futures contracts for natural gas soared 23%.
On our Buy List, shares of SAIC (SAIC) have crept higher over the past few days. This company is basically the IT support desk for the entire Pentagon. I’m exaggerating, but not by much. On February 23, SAIC closed at $79.10 per share. Today it closed at $88.18 per share. That’s an 11.5% gain in four trading days. I don’t have the next earnings date yet, but it will probably be in late March.
The Russia ETF (RSX), which is priced in dollars, has lost 68% in the last eight trading days.
We’re seeing something rather new in warfare: financial warfare. Of course, there have been sanctions before, but nothing quite like this. The closest I can think of is the People Power Revolution in the Philippines in 1986.
In 1983, Benigno Aquino, an opposition leader to the Marcos regime, returned from exile. He was immediately assassinated at the airport which now bears his name. Once the assassination happened, world financial markets wanted nothing to do with the Marcos regime. How can you trust a country to pay its bills when it kills people in broad daylight?
The currency and their bonds plunged. Inflation soared and it turned more and more people against the government. Many revolutions in history were preceded by nasty bouts of inflation. An unsound currency is a good tell that a government is not to be trusted. Interestingly, Ukraine has been able to raise lots of money from crypto contributors. There’s a new twist.
I won’t make any predictions. (I’m only a former PFC.) But I’ll caution you not to worry that what happens in Europe will greatly impact our portfolios. People will still buy Hershey’s (HSY) chocolate and Stepan’s (SCL) chemicals. We’ll probably pay more for certain items. The price for oil surged past $100 per barrel to hit an eight-year high.
As awful as the events are, the impact to the U.S. economy will probably be small. At least for now.
The Limits to Growth Turns 50
Fifty years ago today, a fascinating book was published called The Limits to Growth. The book claimed that the world would run out of valuable resources by the 1980s and 1990s. Its forecast was based on computer models by Jay Forrester of MIT. The book claimed that the world population and industrial production would soon massively decline.
Yikes! Predicting the end of the world is big business. Apparently, the public loves being told that the end is nigh. The disaster stuff was especially popular in the 1970s. Remember Soylent Green? That film takes place in…2022.
The Limits to Growth was a smash hit. It was published in 30 languages, and it sold 30 million copies. Despite its popularity, all of the book’s predictions completely flopped. The book was being updated as recently as 2012.
Why did they get it so wrong? Julian Simon pinpointed their error. Let me turn it over to Wikipedia:
[Simon argued that] the very idea of what constitutes a “resource” varies over time. For instance, wood was the primary shipbuilding resource until the 1800s, and there were concerns about prospective wood shortages from the 1500s on. But then boats began to be made of iron, later steel, and the shortage issue disappeared. Simon argued in his book The Ultimate Resource that human ingenuity creates new resources as required from the raw materials of the universe. For instance, copper will never “run out”. History demonstrates that as it becomes scarcer its price will rise and more will be found, more will be recycled, new techniques will use less of it, and at some point a better substitute will be found for it altogether.
This is a subtle point that’s simple but explains a lot. People are smart. They constantly innovate and update. I bring this up because that’s why the stock market has been such a great long-term investment. It’s the only investment that taps peoples’ ability to create and innovate. It’s also why we’re focused on the long term.
The winning strategy has been to ignore the fearmongers and stick with the companies that have a loyal following. Speaking of investing wisdom.
Warren Buffett’s Shareholder Letter
Last weekend, Warren Buffett released his most-recent shareholder letter. He’s been writing these for over 50 years. They often contain valuable insights from the legendary investor. I wanted to pass along a few items.
Buffett noted that Berkshire used to pay $100 in taxes per day in the 1950s and 60s. Today, it pays $9 million in taxes each day.
Buffett said that Berkshire’s balance sheet now has $144 billion in cash. Of that, $120 billion is held in short-term Treasuries. That means that Berkshire finances 0.5% of Americans’ publicly-held debt.
He says that he doesn’t want to hold that much debt, but there’s not much he sees that excites him. Why is that?
“That’s largely because of a truism: Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important.”
The bold is mine. This is very true and this fact hangs over the entire market right now. Rates are low and that distorts everything.
Buffett also came to the defense of share buybacks.
Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)
Buffett is correct. A few years ago, share buybacks emerged as a public enemy. This is nonsense. They’re perfectly fine as long as the company isn’t vastly over-paying for the shares.
Finally, I have to highlight this: “I taught my first investing class 70 years ago.”
Ross Stores Beats Earnings and Raises Its Dividend
As I was writing this newsletter, Ross Stores (ROST) released its Q4 earnings report and it was a good one. For Q4, Ross earned $1.04 per share which beat expectations by seven cents per share. The deep-discounter is also raising its dividend by 9%.
The shares are up 8.67% in the after-hours market. I’ll have more details on Ross and its earnings report in our premium issue on Thursday. (That’s called a tease.) If you haven’t signed up for the premium issues, you can just use this link. Thank you!
That’s all for now. I’ll have more for you in the next issue of CWS Market Review.