Why Buffett Selling Should Worry You

Hey guys, Eddie here. Today we're going to be discussing why Warren Buffett dumping stock should worry you. This obviously comes as a result of the Berkshire Hathaway conference. So Warren Buffett, one of the world's greatest investors, he actually announced that he sold $6.5 billion of equities, and this was mainly airlines— American Airlines, Delta, Southwest, etc. And he's basically said that he was wrong on the sector, and he bought very little, didn't buy back any Berkshire Hathaway shares. He's a long-term bull that is essentially not very bullish. So this is definitely something to, to look at. He says nothing is attractive despite the 35% drop in markets. That we saw in March. This is a common misconception. Just because something drops in price doesn't mean it's good value, right? If we're looking at an equity, it's only worth as much as the discounted future cash flows, among other things that it can generate. So with so much uncertainty around the coronavirus in terms of earnings, cash flows, you know, modeling that and what a company's intrinsic value is, uh, it, you know, is very difficult. So he's sitting on the sidelines with $137 billion in cash, and this is a hedge for potentially when the Fed fails to prop up stocks with that liquidity. He said that the Fed acted too quickly, and it's a strong, um, you know, it's against Berkshire actually doing any deals right now. Um, the core sectors obviously that got affected by the sell-off: REITs, energy, airlines. Um, you know, their, their sectors are are core reflections of the broader economy. Technology obviously is seen probably as one of the safe havens from this. They are insulated somewhat from complete revenue destruction, but they're definitely not immune from a slowdown in personal, you know, consumption, consumer consumption, or business spending. So there's definitely more risk to the downside than there is to the upside, I believe, right now. We're getting terrible economic data out, terrible earnings data, although we know that they were going to be bad. So now probably could be a good time to, you know, rebalance your portfolio risk. And this is something that I should definitely emphasize, is that, you know, if the FANGs, or the FANGs including Microsoft for example, and paired with Berkshire Hathaway and Warren Buffett's, you know, reluctance to buy stocks and obviously sell stocks. This, you know, why would you buy here? I mean, lots of things are telling you not to. You know, the market's coming a long way from the March bottoms. Great, okay, take your profits now. You know, valuations are extremely stretched and there could be, you know, huge risk to the downside. So definitely maybe a good time to look at your overall portfolio and take some chips off the table. Stocks, obviously, they've notched their biggest monthly gain since 1987, and this has cut losses to the S&P, you know, below or around 10% for the year. And this is obviously driven by Fed liquidity, global central bank easing. I've talked about this, and I'm kind of bored about talking about this analysis because I do think it's quite lazy now, but it's something that can't be ignored, you know, expected to hit $12 trillion by 2021. 38% of GDP, more than 20%, uh, more than QE1, 2, 3, um, combined. So huge liquidity that the Fed's propping up markets. So investment-grade credit, junk credit, they're stepping in and taking the other side. There's been record issuance from companies raising liquidity because they know that they've got a a buyer in the Fed. So stocks have, you know, come roaring back. Amazon and Netflix powering the way, and they've gained about 40% since those March lows. And this is obviously a trend of work from home, you know, everyone's at home using Prime religiously for everything. Netflix has come out with some great documentaries—Tiger King, The Last Dance, Michael Jordan—you know, keeping people entertained. So they've seen record usage, a number of subscriptions. Gilead Sciences, again, is a major driver of this. You know, there's been positive, both negative and positive announcements. This stock was in my coronavirus winners and losers on March 7th. They're up around 29% as a result of the virus drug. Obviously, they're probably our best hope. I do not think that they will have, let's say, a vaccine that can be mass-produced until, let's say, mid-year 2021 or the end of 2021. With earnings, you know, they're bad. We know they're bad. You know, the coronavirus, although slightly sudden, was, um, you know, analysts have taken that into account when they're, you know, they're producing their price targets and earnings. Um, so when they come in as, you know, bad or in line with expectations, you know, you're not going to see too much, um, you know, downside from, from those announcements. But anything better than that or in line, you may see some kind of relief rallies. A big warning, I think, is the tech concentration. So it's the market cap of the 5 largest companies— so Amazon and Netflix, for example, that I've talked about— but now I'm talking about the FAANGs more specifically. Um, so the 5 largest companies as a share of the S&P 500 has now reached 20% of the whole index, which is crazy. Even more for the NASDAQ 100, which is already quite heavily tech-focused. The forward multiple— so the forward P/E multiple is 25.3 times. and this is the same as the height of the tech bubble. The average PE following the market bottoms of the '87 crash, the tech bubble, global financial crisis were about 10.4 to 16.4 and 14 times respectively. So price has to come down if we are to bottom from this. So I do think we retest the lows. I know there's lots of kind of different calls about, you know, we've seen the lows, the lows have been put in, but I do think we see another sell-off. inequities. It's amazing to see how far we've come, 700% since the 2009 global financial crisis low, and they have been emblematic, um, for the US technology-driven rally since the crisis, and they've definitely propped up the market, um, this way. Year to date, the bit— the 5 biggest stocks are up 10%, while the remaining 495 S&P 500 companies are lower by a collective 13%, which is unbelievable. Um, so Facebook, Apple, Amazon, Microsoft, Google have led to this incredible rally, um, but really narrow market breadth. So Amazon up 24% circa, Microsoft 12%, um, and they've even posted positive absolute year-to-date returns, and this is versus the negative 9%, uh, for the S&P 500. So huge concentration in these indices. So if these tech names start to unravel you know, look out below. So what we've seen definitely is the markets and the economy and the huge dislocation between the two. So I get asked about this all the time. GDP from the US was down 4.8%. Unemployment could reach 20 to 30%, 30 million jobless claims, 20 million jobs lost in April according to ADP figures just out. The, the most, uh, or the You know, the most job losses during the financial crisis in one month was 874,000. So that really puts it into perspective. Wages have been stagnating or falling for those that have jobs. Yet it's been the best month for stocks in 33 years. Capital markets are open for Wall Street. The Fed's, you know, propping up markets here, there, and everywhere. The disconnect between the 1% and the 99%, between Wall Street and Main Street, between those that have financial assets and those living, you know, paycheck to paycheck has never been so high. We had the PMIs out today, um, and over the, you know, the recent days, um, PMIs being above 50 is expansionary, below 50 is contractionary. The eurozone 13.6, UK 13.8, uh, the US 27, France 11.2, India 5.4, South Africa 5.1. So this is just terrible economic data, yet we're, you know, nearly all-time highs in the, in the stock market. So look at the, the, these readings as a true barometer of the economy's health rather than the markets, because that is an inflation of financial asset prices as a result of government and central, central bank, uh, support. So one asset I do like, uh, and as I'm recording this video, it's puking a bit, selling off quite dramatically. So gold to double value. So why would you hold gold in your portfolio? It's a hedge against inflation, great store of value historically, indestructible, indivisible, um, and it's a great way to reduce your volatility and risk but to improve returns in a portfolio context. Hedge funds have recently turned really bullish on gold. The US deficit is about to reach 100% of GDP, or forecasted to. We've seen the extreme monetization of debt from central banks all over the world. The last time the Fed tripled the balance sheet like they have now gold then doubled in value. Um, so we've seen the M2 money supply increasing. What are the risks for something like gold? Real yields rising. So like we just saw, um, you know, in the last half an hour or so, um, the Federal Reserve are issuing now 20-year bonds, obviously finance all of this. Um, this is extra supply on the market spiking real yields, and as a result, um, gold, uh, is taking a, you know, a bit of price pressure to the downside. But, um, when this happens, I think, yeah, the equity market does have more risk to the downside. But like we saw before, when equity markets were selling off, this was actually being used as margin calls. The gold positions were being used as, um, to cover equity margin calls. So that's definitely a risk that I would, uh, take into account. Um, there's going to be more headline risk, I think, Trump's definitely taken focus on China, basically saying it was a horrible mistake. They covered the COVID-19 outbreak. The truth is there's going to be loads of conspiracy stories emerging from this, but we'll never know, in my opinion. But one thing that is for certain, I think this is going to have a huge implication— the coronavirus, that is— on US-China trade walks, the talks, the election this year, and the euro area going forward, just because there's going to be under huge pressure, um, both economies, markets, they're going to be under huge pressure. There's such a divergence between the objectives of, let's say, Northern European states like Germany, Holland, and the southern ones like Portugal, Greece, Spain, etc. So that's going to lead to huge tensions, pressure for the euro for sure. But what I want to focus on is JP Morgan taking a look at the sensitivity of the president's tweets on interest rate volatility. So content has drifted away from market-moving topics recently, or over the last few months, where as we kind of saw resolution from the trade war, the quantitative impact therefore has then declined, according to JP Morgan, 70% from their peak. So should the president now take focus again with the global economy in such a fragile state, with valuations extremely stretched, I think the market sensitivity of these tweets is going to dramatically, uh, and the quantitative impact they have on markets. So take a look out for that. More geopolitical tensions rising, this is going to come into focus again. So things to watch: why should, uh, you know, Warren Buffett selling his equities worry you? It should. I think now is the time to de-risk your portfolio. If you've been participating in the gains like we've seen since the bottom, great. I think asset class diversification, not just stock Diversification is important. Myself, I am bullish on gold and miners, um, like we're seeing now. There could be some good pullbacks in gold to get long. I think equities are overvalued, valuations are stretched, and the big risk is to the downside. The Fed has pretty much killed interest rate volatility, bond volatility, but now real yields are spiking, and any more supply of government debt is going to lead to yields spiking further. So I'm out of my Treasury long. Inflation and deflation— and this is a question I get asked all the time— is there going to be inflation as a result of this liquidity? Is there going to be deflation from lack of demand? We're going to see a real clash of inflationary and deflationary forces, in my opinion. I think we're going to see, um, you know, a continuation of stagflation, or, uh, if deflationary forces, but then I believe that we're going to see inflation kicking in. I don't like financials, I haven't for a long time, but like we saw recently from the ECB, if there's short-term relief in terms of government central bank support to ensure this liquidity in terms of them lending to businesses, you know, there could be some short-term opportunities there. Oil was crazy a few weeks ago, but now it seems that the demand side has bottomed out. Um, you know, I think You know, we hit $30 a barrel. I think we're overextended now. Obviously, it's the start of this month. We are now looking at June futures contracts. So will we have that storage problem? I don't think it's gone away. The demand side will probably improve as the coronavirus kind of sanctions and lockdowns are relieved in terms of Italy, Spain, you know, starting to let people out, businesses out. This could bring some demand back online. But I do think we're slightly overextended given that, um, you know, my analysis before was we are sub-$35 a barrel until 2021 according to the futures curve. Um, obviously the best strategy— buy what the Fed buys before they buy it. Um, front-running the Fed. And Bank of America have written a note to the Fed. JP Morgan, BlackRock are all basically saying that, um, you know, if you bought the S&P every time during open market operations performed by the Federal Reserve, you know, you would have done extremely well. The lockdown easings will be bullish short term, but this does not get away from the fact that the coronavirus has caused a huge demand shock. And, you know, at the end of the day, it's not going to be a quick fix, but any headlines like lockdowns easing will most likely see asset prices inflate, uh, further. Um, EM is going to be under huge pressure. They're using huge amounts of foreign exchange reserve to prop up their current currency against the dollar. And obviously the— there's been a huge shortage of dollar, um, dollars around the world, and this has been eased by the swaps. But obviously there's been another kind of pressure of the Fed liquidity and the printing of money, which could lead to a monetization of debt. Um, lots more to talk about, I'm sure, but I wanted to just record a a quick video for you for the bank holiday weekend. I hope you enjoyed and take care.