The Letter That Warren Buffett Read: Buffett Spends Record $2.2 Billion Buying Berkshire Shares (Berkshire’s Cash Pile Hovers Close To Record, At $128 Billion)

Berkshire-Hathaway’s Warren Buffett released his 2020 annual letter to shareholders. Aka, the letter that Warren Buffett read.

(Bloomberg) — Warren Buffett kicked his stock-buyback program into high gear, spending $2.2 billion on repurchases in the last three months of 2019, the most ever in a single quarter — and he’s looking to buy even more.

Buffett’s Berkshire Hathaway Inc., which loosened its repurchase policy almost two years ago after being stymied on the dealmaking front, has since taken a cautious approach to buybacks, acquiring only $6.3 billion of stock. In the fourth quarter, Buffett bought shares every month, and has no plans to slow down, if the price is right.

“Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard,” Buffett said in his annual letter to shareholders Saturday. “We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.”

Even as Buffett ramped up his repurchases, Berkshire’s massive pile of cash hovered close to a record, totaling $128 billion at the end of 2019. Buffett, Berkshire’s chairman and chief executive officer, has sought to redeploy those funds into higher-returning deals or stock purchases, but has been stymied by what he’s said are “sky-high” prices for good businesses.

Buffett spent a portion of his annual letter reassuring shareholders about the future of the company once it’s no longer run by the billionaire investor and his business partner, Charlie Munger, who turned 96 this year.
“Berkshire shareholders need not worry: Your company is 100% prepared for our departure,” Buffett said.

At Berkshire’s annual meeting in May, shareholders will be able to submit questions to be answered by lieutenants Ajit Jain or Greg Abel, Berkshire vice chairmen who are considered top contenders to someday replace Buffett. They answered a few investors questions at last year’s meeting.

Berkshire’s operating earnings fell to $4.42 billion in the fourth quarter, down 23% from a year earlier, driven by underwriting losses at its namesake reinsurance group, which was hurt by typhoons in Japan, wildfires in California and Australia, and widening losses at its business writing retroactive reinsurance contracts.

Berkshire’s Class A shares last year underperformed the S&P 500 Index by the widest margin since 2009. The stock has gained just 1.1% this year.


Also in Berkshire’s 2019 annual report, released alongside Buffett’s letter Saturday:

Kraft Heinz Co., which counts Berkshire as its largest shareholder, had a tumultuous 2019, with writedowns, management shakeups and downgrades to junk. Buffett’s company carries its Kraft Heinz investment on its balance sheet at $13.8 billion, a figure unchanged since 2018’s fourth quarter, even as the market price of the stake dropped to $10.5 billion at the end of last year.

Berkshire’s BNSF railroad posted a 3.8% gain in profit in the fourth quarter, just shy of record earnings in the previous three months, as a decline in expenses helped counter falling revenue across shipments of products such as coal, consumer items and agricultural goods. BNSF posted a regulatory filing Friday night, on the eve of the release of Buffett’s annual letter, giving investors a sneak peek of results.

BRK-A’s Q4 2019 Earnings are nothing to write home about.



Fortunately for Buffett, Munger and BRK/A investors, The Federal Reserve has pumped so much liquidity into the market that even for a company with Titanic losses in insurance and  Kraft/Heinz.


And this settlement didn’t help: “Wells Fargo Pays $3 Billion, Avoids Prosecution Over Abuses”

Hmm. Well, the Wells Fargo wagon is a comin’ down the street ..


US Existing Home Sales RISE 9.64% YoY As Mortgage Rates Plunge, Inventory Remains MIA

Today’s headlines scream “Existing home sales decline 1.3% MoM in January!!” True, but on a YoY basis, US existing home sales are up 9.64%.

A big reason? The 30-year mortgage rate plunged faster than a paralyzed falcon. Mostly due to slow global economy and the Corona-virus fears.


Now look at the median sales of existing homes. It continues to be low helping drive up existing home prices.


Notice that EHS inventory increased with median price during the housing bubble, but after 2012, they went their own ways.

I hope the housing market remains Corona-virus-proof!




10 European Nations Have Negative 10-Year Sovereign Yields (US 10Y Yield Falls Under 1.5% Again)

18.  That is how many European nations have negative 2-year sovereign yields.


And 10 European nations have negative 10-year sovereign yields.


Swimming over to the US shore, the US Treasury 10-year yield has fallen below 1.5% … again.


Here is the TBA screen showing the current Option Adjusted Spread and Option Adjusted Duration.


Dollar Bop! US Dollar Index Approaches 100 (Golden Cross) As Coronavirus Fears Mount (Gold Rising Too!)

The US is experiencing the Dollar Bop!

The Dollar Index looks poised for a run at the 100 level for the first time since 2017 as investors seek out the safety of American assets amid the ongoing coronavirus spread.

The U.S. currency has benefited this week from a narrowing in haven options, with the yen slumping to a nine-month low on fears the outbreak could push an already struggling Japanese economy into recession. In contrast, U.S. stocks closed at a fresh record Wednesday, Treasuries are seeing continued demand and a bullish golden cross pattern is set to form in the dollar gauge, suggesting further upside is possible.


The golden cross is a candlestick pattern that is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (such as the 15-day moving average) breaking above its long-term moving average (such as the 50-day moving average) or resistance level.

The US dollar index follows President Trump’s approval rating. Or is it that Trump’s approval rating mirrors the US economy?


Gold is also flashing a technical buy!


Gold surpassed $1,600 an ounce this week and its climb may not be over yet. The GTI Vera Convergence Divergence Indicator, a technical measure which detects trend exhaustion, triggered a buy signal on Tuesday, its first since the end of January. Growing concern over the potential impact of the coronavirus on the global economy is boosting haven demand for the metal, which is now closing in on a seven-year high.

Mortgage Hedging Sputters, Sapping Energy Behind Treasuries (Fed Tapped Out)

I had to read this Bloomberg headline several times: “Locust Swarms Ravaging East Africa Are the Size of Cities”

Are the swarms the size of cities or the locusts? If so, those are some pretty big locusts!

But on to Treasury / MBS news.

(Bloomberg) — The mortgage market helped fuel U.S. Treasury yields as they rocketed toward historic lows in 2019. Don’t expect a repeat in 2020 because that propellant appears to be tapped out.

Homeowners refinanced loans in droves last year as they sought to lock in lower rates. As the original loans disappeared, investors in mortgage-backed securities bought swaps to get their newly out-of-whack portfolios back in order. Such convexity hedging tends to drive Treasury yields down. That dynamic was especially prominent in March 2019 as rates on 10-year notes sank 31 basis points after a surprise Federal Reserve policy shift.


Today, the relationship appears to have weakened. A Bloomberg Barclays index of MBS portfolio duration has fallen since the beginning of this year, but longer-dated swap spreads have held steady. This decoupling is evidence that hedging flows are now not likely to crater yields. The index closed down at 2.65 on Tuesday, a third consecutive daily drop.


So, The Fed seems tapped out.


And is having trouble making markets dance.


Death of Small Firm Effect? FAAMG (Tech) Index Is Killing Small Firm Index (With The Help Of Uncle Jay)

The small firm effect is a theory that purports  that smaller firms, or those companies with a small market capitalization, outperform larger companies.

However, since 2019, larger cap firms have been outperforming small cap firms with small cap firms having trouble beating Treasuries!!


The FAAMG index, Facebook, Amazon, Apple, Microsoft, Google, Alibaba, etc. has been skyrocketing in price.


The recent surge in FAAMG corresponds to the reversal in Federal Reserve tightening.

Of course, Apple (AAPL) just issued a warning Monday that it may fail to meet this quarter’s sales guidance thanks to slower production and weaker demand due to the disease known as COVID-19.


That is why we diversify!




My Kuroda! Japan’s Real GDP Falls 6.3% QoQ As Kuroda Considers MORE Monetary Stimulus Despite Yield Curve Being Negative Past 10 Years (Coronavirus Warning)

My Kuroda!

Japan’s economy took another battering from a sales tax in the last quarter, contracting by the most in more than five years and fueling recession concernsas the widening coronavirus outbreak hits activity at the start of 2020.

The nation’s gross domestic product shrank at an annualized pace of 6.3% from the previous quarter in the three months through December, according to a preliminary estimate by the Cabinet Office Monday. October’s sales tax increase and super typhoon heavily weighed on economic activity, cooling consumer spending, business investment and production supply chains.

-6.3% QoQ (Annualized) growth?


Apparently, the Bank of Japan’s pushing their sovereign yield curve into negative territory for maturities of less than 15 years has not done the trick.


(Bloomberg) — Bank of Japan Governor Haruhiko Kuroda says the novel coronavirus is the biggest uncertainty facing the Japanese economy right now and the central bank won’t hesitate to take additional monetary policy action if needed.

Kuroda means even MORE monetary policy action.


My Kuroda!


70% Chance Of Recession In Next Six Months (According To MIT and State Street Study)

According to a new study by MIT and State Street, there is a 70% chance of recession in next six months.

The researchers created an index comprised of four factors and then used the Mahalanobis distance — a measure initially used to analyze human skulls — to determine how current market conditions compare to prior recessions.


Using this principle, the researchers analyzed four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve — on a monthly basis. They then measured how the current relationship between the four metrics compares to historical readings.

This recession measure is at odds with other recession probability forecasts which forecast a recession in the next twelve months at only 28% or less.


Recession is defined as two consecutive  quarters of negative GDP growth.  Well, it is possible that the coronavirus will damage China GDP and maybe US GDP, but the MIT/State Street study is based on Industrial Production, Non-farm payrolls, the stock market and the yield curve slope. Only the yield curve slope (orange line) and Industrial Production (yellow dashed line) are showing recession-like trends. 


Unless of course, MIT/State Street are saying there is a stock market bubble that will burst.

Here is a visualization of the impending recession and Mahalanobis skull measure.


Fannie Mae Pushes Financial Crisis Highs In Terms Of DTI and CLTV (Another Fine Mess?)

The GSEs (Government Sponsored Enterprises) of Fannie Mae and Freddie Mac have seeming forgotten the financial crisis.

Fannie Mae, for example, now has the highest average combined loan-to-value (CLTV) ratio in history. Even higher than during the financial crisis.


How about borrower debt-to-income (DTI) ratio? Fannie Mae’s average DTI is the highest its been since Q4 2008.


At least the average FICO scores remains above financial crisis levels.


Well its another fine mess that lenders, GSEs and their regulators have gotten us into.


Gold, US Dollar Inverse Correlation Weakens Due To Coronavirus Fears

The coronavirus is ravishing China … and may soon ravish the USA as well. As a result, the inverse correlation between gold and the US dollar is weakening and resembles the weakening that occurred during the financial crisis.


Yes, gold is rising again in the face of coronavirus fears ravaging the Chinese economy.


The CFTC’s Gold Non-commercial long contracts/futures remains near an all-time high.


Here is the gold/US dollar volatility surface.