The Afternoon Audit
Monday | 5.04.2020

U.S. Stocks Finish Slightly Higher

Catch Up Quick

• U.S. stocks opened in the red this morning but finished slightly above even due to strong pull from big technology, as market breadth continues to narrow

• California Governor, Gavin Newsom, says some businesses will reopen Friday, with certain conditions in place

• According to European Commission President Ursula von der Leyen, the European Union will need more than a trillion euros to rebuild its economy

• Colleges around the U.S., afraid they'll be headed for financial catastrophe if they remain closed, are making plans to welcome students back to campus this fall with social distancing still in place

• Retailer J. Crew filed for Chapter 11 bankruptcy protection this morning

My Monday Opinions

• As the S&P has rallied over 12% since the start of April, overall price action has entirely based on a successful reopening on the U.S economy, leaving huge downside if reinfections occur

• China’s dominant role in global supply chains has peaked (in the short term) due to the COVID-19 pandemic, as companies weighing in on this situation & growing tensions between China and the U.S aim to diversify their operational risk away from a single country

Berkshire Shareholders Meeting

Key Points

• Many credible investors tuned in this past Saturday to hear "The Oracle of Omaha" (Warren Buffett) discuss current market conditions, in which he:

  • Stated Berkshire Hathaway posted a net loss of $50B

  • Decreased exposure to stocks

  • Increased cash balance to $137B

  • Sold his entire stake in airlines

  • Advised against leveraged investing

  • Advocated for S&P 500 index funds

  • Stated he was bullish on America in the long-run

  • Remained very uncertain about the near-term

Berkshire's Losses Weren't the Worst Part

• Despite the huge losses driven by large exposure to the airline industry and economic effects of the pandemic, Buffett had an even bigger shortcoming that he didn't talk about much

• In the year after the 2008 financial crisis, Buffett entered some of his most successful investments, using stockpiled cash that was ready to deploy

• Berkshire acted as lender of last resort to "bail out" companies such as Goldman Sachs, Bank of America, and Dow Chemical, among others, who were on the verge on bankruptcy / insolvency and were essentially forced into accepting the deal terms he offered

• Buffett was ready to do this again, sitting on over $130B in cash, ready to act as a lender of last resort yet again, even admitting he was waiting for "an elephant" to come along

What Hurt Buffett the Most

• Unprecedented actions by the Federal Reserve such as huge stimulus packages and commitments to buy corporate bonds foiled Berkshire's plan

• Struggling companies were able to find financial relief via the Fed, accepting terms that Buffett simply couldn't compete with

The Bottom Line

• Often times, banking on past events is not a good forward looking strategy