A Year to Forget – Highlights from Edgemoor’s Winter 2016 Newsletter

In this latest installment of our quarterly report, my colleagues and I share some observations on the fourth quarter of 2015 and offer our outlook for the global economy and markets. Click here to go to the full report on our website.  Following are a few highlights:

  • Stocks rebounded in the fourth quarter but finished 2015 essentially flat.  The U.S. Federal Reserve, energy, and China provided the major themes for the year.
  • Now 2016 has gotten off to a rocky start, with China’s currency moves and related concerns about this largest of emerging economies rattling markets.  Another concern is that oil prices remain low, which is good for consumers but bad for energy producers, and the ultimate impact on the global economy of energy sector woes remains to be seen.
  • We are modestly bullish on prospects for 2016 and expect continued support for stocks from improving economic conditions in the United States, worldwide central bank policies that will encourage further economic growth globally, and reasonable equity valuations. Risks and concerns in 2016 will echo those from last year, namely the path of interest rates, the direction of oil prices, economic conditions in China, and geopolitical issues in the Middle East.
  • We believe stock valuations are reasonable. The S&P 500 index currently trades for a multiple of about 16 times estimated earnings for the coming year, close to its historical average.
  • Given today’s historically low interest rates, we still favor other income investments, such as preferred stocks, convertible securities, utilities, real estate investment trusts, and other securities with higher yields, over bonds.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

Posted in Edgemoor Insights | Leave a comment

Seeking – and Finding – Opportunities Amidst the Volatility

In this latest installment of our quarterly report, my colleagues and I share some observations on the rocky third quarter of 2015 and offer our outlook for the global economy and markets. Click here to go to the full report on our website.  Following are a few highlights:

  • Investors’ concerns about global economic growth, falling commodity prices, the timing of the U.S. Federal Reserve Bank’s changes to interest rates, and geopolitical uncertainty combined to bring stocks down sharply in the third quarter.  However, stock markets have rebounded somewhat since then.
  • The third quarter brought the first correction, a drop of 10% or more from recent highs, since 2011.  On average, the market experiences a correction about once per year, so by that measure this one may have been long overdue.
  • Analysts believe profits for the energy sector fell over 60% in the third quarter, likely accounting for much of the stock market drop.  However, energy shares have risen since on higher oil prices.
  • We believe the share price decline of pipeline, or midstream, companies overstates the potential negative impact of lower energy prices and ignores the fact that many midstream companies derive the vast majority of their cash flows from transportation of oil and gas under long-term contracts, not from production.  In fact, some companies have maintained or increased their distributions to investors during 2015.
  • Volatility continues in the stock market, and we think it will stick around for a while.  In the meantime, we see potential opportunity amidst the turmoil.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

Posted in Edgemoor Insights | Leave a comment

Greece Is the Word – Or Is It?

In this latest installment of our quarterly report, my colleagues and I share some observations on the second quarter of 2015 and offer our outlook for the global economy and markets in light of recent events in Greece and China.

Click here to go to the full report on our website.  Following are a few highlights:

  • Stocks paused in the second quarter due to uncertainty about the global economy and U.S. Federal Reserve action along with meager corporate profits. Bonds and other income generating investments fell as investors parsed the Fed’s interest rate signals.
  • Recent market and economic news from Greece and China and ongoing U.S. Fed deliberations pose threats to economic prosperity and rising markets.  However, there are positive trends afoot that leave us still thinking that the U.S. stock market can show positive gains for the year.
  • The U.S. economy continues to expand at a slow pace and is on track for GDP growth of about 2% for the full year.  Consumer spending, supported by reduced energy prices and the ability of consumers to borrow at rock bottom interest rates, has been the primary factor helping GDP and has boosted sectors such as autos and housing.
  • Following the rise of price/earnings multiples over the past few years to levels that are in line with historical averages, the U.S. stock market is dependent upon corporate earnings to support higher prices.  Though second quarter earnings are expected to be on the weaker side, we anticipate better earnings later this year as the U.S. and foreign economies gain momentum.
  • Current indicators point to the most likely scenario being a first Fed move either late this year or in 2016.  We believe the Fed will most likely raise rates gradually as businesses hire more workers and the unemployment rate falls.  We also believe a gradual rise in rates due to improved economic conditions could be a good sign for the stock market, which has performed well in past times of incremental rate hikes.
  • However the Greek situation resolves, we believe there will be continued volatility in Europe over the coming months but limited long-term impact on the European economy or markets.  The European economy is improving, banks are much healthier, and we do not foresee Greece’s problems spreading to other members of the EU.
  • Having more than doubled over the past year due to government policies that encouraged investing, stocks in China reached unreasonably high valuations and may fall more than their recent plunge.  Even if the government succeeds in stabilizing the stock market, we believe the lower expected growth rate of the Chinese economy poses a long-term challenge.
  • We are optimistic about the markets due to what we see as improvement in the global economy and financial system, reasonable valuations that could be higher given current low interest rates and high profit margins, and our careful selection of what we believe to be undervalued securities for our portfolios.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

This material is not financial advice or an offer to buy or sell any security product. The opinions expressed within this blog posting represent an assessment of the market environment at a specific point and time and they are not intended to be a forecast of future events or a guarantee of future results. This blog post does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. All the opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing.

Posted in Edgemoor Insights | 1 Comment

More on Buffett and Munger

Here is another great summary of some of the comments from Warren Buffett and Charlie Munger at the Berkshire Hathaway annual meeting: The Warren Buffett & Charlie Munger Show.

Posted in Edgemoor Insights | Leave a comment

50 Years of Warren Buffett at Berkshire

2015 marks 50 years since Warren Buffett took the helm at Berkshire Hathaway and the roughly 40,000 attendees at this year’s annual meeting were in a celebratory mood.  The morning began, as usual, with a video.  The highlight of this year’s production was a hilarious bit featuring Warren Buffett as the Berkshire Bomber facing off in a grudge match against welterweight boxing champion Floyd Mayweather.

With the video feature concluded Warren Buffett and Charlie Munger took the stage for the main event, their annual question and answer session.  The Q&A was, as always, wide ranging and included audience questions from natives of Germany, Taiwan, China, Korea, and a seventh grader from Florida.

There was much well deserved praise for Mr. Buffett and Mr. Munger on their remarkable longevity and success running Berkshire, and the role of Berkshire’s corporate culture in creating and maintaining its success was a thread that ran throughout the Q&A session.  Choosing carefully those you associate with, nurturing your reputation and setting the proper tone at the top were all offered as key components for anyone seeking to create and sustain an enduring corporate culture.  They emphasized that Berkshire’s culture was not created overnight and that good fortune and being ready and open to opportunities when they were presented were also important parts of their success at Berkshire.

Not every questioner heaped praise on Berkshire.  The morning’s first question was probably the most pointed.  A shareholder asked Mr. Buffett to defend mortgage lending practices at Berkshire’s manufactured home subsidiary Clayton Homes.  Mr. Buffett, clearly anticipating a question on Clayton, offered a well-documented and persuasive defense of Clayton and its lending practices, pointing out that 97% of Clayton’s borrowers successfully pay off their mortgages and concluding that “Clayton has behaved very well.”

The same shareholder also questioned Berkshire’s association with buyout firm 3G Capital which has a reputation for cutting jobs at the companies it acquires.  With respect to 3G, Mr. Buffett remarked, and Mr. Munger seconded, that some of the companies it acquired had too many employees to work efficiently and that no one is required or expected to retain more people than needed to run a business.  He added that after being acquired by 3G, performance at those companies improved considerably.

Succession, which has been a frequent topic at Berkshire meetings in recent years, was discussed only briefly this year with Mr. Buffett stating his belief the person at the top must have extensive operational experience, not simply investing prowess.

On stock valuations Mr. Buffett was asked whether he felt that the ratio of total market capitalization to GDP, one of his favored market valuation metrics, was now too high.  He responded that in the current environment of exceptionally low interest rates current valuations were very reasonable.

They also remarked that the reinsurance business, where Berkshire is a major player, is not the attractive business it once was as competition has grown and made pricing unattractive.

Responding to a question about China and whether the principles of value investing have applicability there, Mr. Buffett and Mr. Munger agreed that the principles of value investing know no borders.  They added that China could benefit from shifting toward a more value-oriented approach to investing and away from the speculative fevers that tend to dominate markets in China today.

Turning to China again, both Mr. Buffett and Mr. Munger expressed admiration for the speed with which China has transformed itself over the past four decades and agreed that China and the U.S. must find a way to cooperate over the long term for their mutual benefit and for the benefit of world.

On the acquisition front, both expressed interest in doing more deals in Europe, having recently closed on the acquisition of a German motorcycle equipment retailer.

As the Q&A wound to a close Mr. Munger offered a fitting conclusion, saying that simply being a shrewd investor, passively holding stocks, is not enough to make a life satisfying and that we all should strive to contribute more.

Posted in Edgemoor Insights | Leave a comment