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My Valuation Of Berkshire With Bear, Base, And Bull Case
More than a year ago, I did a valuation on Berkshire Hathaway but time has passed and things have changed. Currently, the shares of Berkshire Hathaway are under pressure. Is this a good moment to add to your position or should you cut your losses?
In this article, I will update my valuation, put more emphasis on the insurance operations, and give a bull, base, and bear valuation.
Valuation of Berkshire Hathaway
Berkshire Hathaway is a conglomerate with very different operations. Because of this, it is best to use a Sum of the Parts (SOTP) calculation. Warren Buffett took away any doubt with his last letter in which he said:
Focus on the Forest - Forget the Trees
Warren said that it was best to focus on five large groves, which is actually somewhat similar to how I always valued Berkshire Hathaway.
The five groves are:
- Non-insurance operating businesses
- Equity investments
- Shared control businesses
- Cash and cash equivalents
- Insurance operations
Starting with the most important part of Berkshire Hathaway, its operating businesses. Since Berkshire Hathaway did not buy significant operating businesses, the composition did not change much. The operations themselves evolved and posted a record $16.8B in earnings. The easiest way to value them is just slap a reasonable multiple on these earnings. If you value them at 15 times earnings, you could come up with a value of $252B. If you think 18 is more reasonable value, it increases to $302.4B.
Previously, however, I also did calculations for the individual large operations and I will update these to check if this quick and dirty calculation makes sense.
- BNSF railroads are the largest operation, and results in 2018 have been great. BNSF benefited from higher revenues and lower taxes. BNSF increased earnings of 31.8% from $3.96B to $5.22B. Closest competitor Union Pacific Corp. (UNP) generated $5.97B in profits and is worth $120B or 20.4 times earnings. Personally, I would not buy a railroad at 20 times earnings and I'm pretty sure neither would Warren Buffett. The reason for this is that depreciation is consistently lower than maintenance capital expenditures. For a bull case, however, I think using a multiple of 20 is fine, which results into a value of $104.4B. For the base case, I use 17 which results in $88.74B, and for a bear case, I use a price earnings multiple of 14 which leads to a value of $73.1B. Last year, my estimated value amounted to $75.4B, primarily due to lower profitability.
- Berkshire Hathaway increased its ownership of Berkshire Hathaway Energy from 90.2% to 90.9%. Pre-tax profits stayed virtually the same, but due to tax benefits and increased ownership, profits attributable to Berkshire Hathaway increased 28.9% from $2.03B to $2.62B. Many utility companies have become fairly expensive and trade around 20 times earnings. This leads to a bull case valuation of $52.4B. In a base case scenario, a P/E of 16 leads to a value of $41.9B. A bear case valuation with a P/E of 14 results in a valuation of $36.69B. Last year, I estimated that the value of Berkshire Hathaway Energy was $38B.
- Manufacturing service and retailing in total generated $9.36B in earnings. An increase of 28.6% compared to the $7.28B generated in 2017. Manufacturing is by far the largest component and consists of industrial products, building products, and consumer products. Given that I will focus on the groves, I will no longer discuss all the divisions in detail. All groups saw profit increases except wholesaler McLane that saw its profitability dwindle to $246M on sales of $50B. Given the strong growth profile of the combined group and its more cyclical exposure, I will use a slightly broader range between the bull and the bear case. For the bull case, a multiple of 20 will lead to a valuation of $187.2B, the base case gives a P/E multiple of 15 and this results into a value of $140.4B. For the bear case, we take into account reliance on somewhat cyclical industries and use a P/E of 10 to come up with a value of $93.6B. Last year, I valued all these businesses at $131.4B, which included finance and financial products. This division is now included by Berkshire Hathaway into manufacturing (Clayton Homes) service and retailing (CORT and XTRA).
Combining all operating divisions leads to a bull valuation of $344B, a base value of $271B, and a bear case value of $203.4B compared to $245.8B last year.
Equity investments at year-end were worth nearly $173B. Due to a recovery in the stock markets, the value recovered to $191.8B at the end of March. Apple (AAPL) is now clearly the largest position at $47.4B. Followed by Bank of America (BAC) ($24.7B), Wells Fargo (WFC) ($19.8B), Coca-Cola (KO) ($18.7B), and American Express (AXP) ($16.6B). I would value these equity investments and face value of $191.8B, but for a bear case, you could subtract given your limited flexibility and unpaid taxes. A 10% discount would result in a value of $172.6B.
Warren Buffett puts the shared control investments in a different grove, which includes the troubled investment in Kraft Heinz (NASDAQ:KHC). After tax profit was $1.3B. Using multiples of 16, 14, and 10, we get a bull, base, and bear value of $20.8B, 18.2B, and $13B.
Cash and cash equivalents
Cash and cash equivalents amounted to $114B at the end of March. Given that Berkshire Hathaway will always keep $20B to guard against external calamities, you might subtract that or add it to the insurance division.
Most of the time, people spend looking primarily at the asset side of an investment. Warren and Charlie, however, have spent considerable time on the construction of their liabilities. In these liabilities lies the largest advantage to Berkshire Hathaway. The insurance liabilities that Warren Buffett calls float are basically an interest free loan. Given the ability of Berkshire Hathaway to consistently grow the float, it is actually a growing interest free loan. The float in 2018 increased 7.2% from $114.5B to $122.7B. In 2018, the insurance operations recorded a profit of $2B, while in the last 16 years, the profit amounted to $27B or $1.69B per year.
How to value the float is up for much discussion and is the primary reason to write this article.
Bull case insurance: The float continues to grow at 5% per year and insurance profits stay at $2B. The current float is valued like equity and is worth $122.7B, 5% annual growth ($6.1B) is capitalized at a multiple of 12 leading to a value of $73.6B. The profits from the insurance operation are valued at a P/E of 15 leading to $30B in value. Combining those components leads to a value of $226.3B.
Base case insurance: The float grows at 3% and profits stay at $1.69B. The current float is valued like equity and worth $122.7B, the 3% annual growth is capitalized at a multiple of 10 leading to a value of $36.8B. Profits from the insurance operation are valued at 12 times earnings leading to $20.3B. Combining the value amounts to $179.8B.
Bear Case insurance: The float shrinks at 3% and profits decline to $1B. The current float is valued like equity ($122.7B) but is declining. The decline of the float by 3% is capitalized at a multiple of 10 leading to -$36.8B that needs to be subtracted. Insurance profits are valued at a multiple of 10 leading to $10B. Combining the value amounts to $95.9B.
Given the huge disparity in the valuation of both the bull and the bear case for insurance operations, I'm very interested in other scenarios and their plausibility.
Other sources of funding
Except traditional equity, debt and the discussed float Berkshire has another form of funding. Deferred income taxes - These are liabilities that we will eventually pay but that are meanwhile interest-free. They amount to $50.5B and arise from holding stocks for periods of time ($14.7B) and accelerated depreciation ($28.3B). This last source is virtually certain to increase into the future given Berkshire Hathaway's appetite for investments and range of possibilities. For the Bull case, I do not subtract any value, but for base case (-$5B) and bear case (-$15B), some subtraction compared to equity might be reasonable.
Sum of the parts is less than the whole
Sum of the parts is less than the whole. Berkshire Hathaway can invest more tax internally and management can focus solely on operations instead of short-term shareholders. There is a reason the operations are brought together in one company. Calculating the value separately does not do this synergy justice. For this reason, it is possible to add even more to the valuation for the bull case or a reason not to sell when the bull case price target is reached.
Calculation of Berkshire Hathaway value
Float is part of the liabilities side and already invested in assets. This is something why we should not double count it.
Bull case value:
- operating businesses: $344B
- listed equities: $191.8B
- shared control: $20.8B
- cash and cash equivalents: $114B
- insurance: $226.3B
- Subtraction float & other: -$122.7B
Base case value:
- operating businesses: $271B
- listed equities: $191.8B
- shared control: $18.2B
- cash and cash equivalents $94B
- insurance: $179.8B
- Subtraction float & other: -$127.7B
Bear case value:
- operating businesses: $203.4B
- listed equities: $172.6B
- shared control: $13B
- cash and cash equivalents: $94B
- insurance: $95.9B
- Subtraction float & other: -$137.7B
Given that the current market capitalization of Berkshire Hathaway is $490B, the bear case gives a potential downside of 10%, while the optimistic bull case sees 58% upside. Given the fortress balance sheet, I recently added to my Berkshire position and playing with the idea of adding more.
A NEWS BRIEF 4
Stocks are continuing to sour following the steepest May selloff in nine years as DJIA futures begin the month down another 150 points and bonds rally, with the 10-year Treasury yield slipping a further 6 bps to 2.08%. Besides a protracted trade dispute with China, the Trump administration is opening several other battles, removing India from a privileged-trading program and pushing tariffs on Mexico unless it addresses the southern border. "Mexico is sending a big delegation to talk about the Border. Problem is, they've been 'talking' for 25 years," Trump wrote on Twitter. "We want action, not talk. Otherwise, our companies and jobs are coming back to the USA!"
TRADE WAR ENDANGERS MAGA
Washington's escalating trade war with Beijing has not "made America great again" and has instead "done serious harm to the U.S. economy," according to a Chinese government white paper that said unreasonable demands led to the collapse of trade talks in May. The document also claimed the U.S. was an untrustworthy negotiator and that any further discussions need to be based on sincerity, mutual respect and equality. China doesn't want a trade war with the U.S. but won't shy away from one, according to Vice Commerce Minister Wang Shouwen, who said the latter's strategy of maximum pressure and escalation can't force concessions.
Talks with Mexico
Mexico's president on Saturday hinted his country could tighten migration controls to defuse President Trump's threat to impose tariffs and expects "good results" from talks planned in Washington this week. Lopez Obrador also said Mexico would not engage in any trade wars with the U.S., but noted that his government had a "plan" - although he didn't specify details - in case Trump did apply the tariffs. Illegal crossings into the U.S. in May were expected to have outpaced the 99,000 people apprehended at the border in April.
Ahead of his arrival in London for a three-day state visit, President Trump encouraged the U.K. to "walk away" from any negotiations with the EU if the country is unable to secure a "fair deal" and said it "shouldn't pay" the $50B so-called "divorce bill" unless the bloc backed down. A "very big U.S. trade deal" will also be on offer once the country is finally free. Breaking with decades of political protocol, Trump further expressed a preference for Boris Johnson to replace outgoing Theresa May, as well as suggesting Nigel Farage should lead Britain's stalled Brexit talks.
FTC takes on Amazon, DOJ to oversee Google
Amazon (NASDAQ:AMZN) could face heightened antitrust scrutiny under a new agreement between the government's twin antitrust agencies that puts it under closer watch by the Federal Trade Commission. The move would divvy up competition oversight of two of the country's top tech companies, with the U.S. Justice Department having more jurisdiction over Google (GOOG, GOOGL.) AMZN -1.1%; GOOG -2.7% premarket.
What’s happening at WWDC 2019?
The latest version of Apple's (NASDAQ:AAPL) iOS, 13, is unlikely to mark a radical overhaul, but instead will boast a series of incremental improvements like "dark mode." The end of iTunes is also anticipated - with Apple (AAPL) breaking music into its own app - as well as updates to make the Apple Watch more independent. Don't expect a lot of new hardware, but there is a chance that Apple discusses a high-end Mac desktop computer, which would fit in with the conference’s programming focus. WWDC kicks off with a livestreamed keynote address at 1 p.m. ET.
Digging deep for semis
Infineon (OTCQX:IFNNY) has agreed to buy Cypress Semiconductor (NASDAQ:CY) in a deal that values the U.S. maker of microchips used in cars and smartphones at €9B including debt, sending shares in the German company down 6.5% on concerns over the cost. "It's a proud price, no doubt," Infineon CEO Reinhard Ploss said. "From our point of view it was an acceptable price, and if you look at the synergies, it represents an additional gain in value." The acquisition follows a quiet few years in semiconductor M&A, which peaked at $107B in 2015 before deals were derailed, such as Qualcomm's (NASDAQ:QCOM) $39B proposed purchase of NXP (NASDAQ:NXPI). CY +27% premarket.
The Commodity Futures Trading Commission is in "very early stages of conversations" with Facebook (NASDAQ:FB) in an effort to understand whether the company's plans for a cryptocurrency would fall under the regulator's auspices. The bulk of the trading in Bitcoin, for example, is done via futures rather than cash-based markets, but Facebook's GlobalCoin - a version of a stablecoin - might be limited to the latter and therefore fall outside the CFTC's remit. That would nonetheless leave some "basis risk," a term that describes a situation in which the price of an underlying instrument and its derivative do not move perfectly in sync.
Largest private real estate transaction
Blackstone (NYSE:BX) is buying a network of U.S. industrial warehouses from Singapore-based GLP for $18.7B, in the largest private real-estate transaction ever. It's a big bet on the continued explosion of e-commerce and delivery as global investors spend billions of dollars to acquire logistics assets. Blackstone outbid real-estate company Prologis (NYSE:PLD) for the 179M-square-foot portfolio, nearly doubling the size of its U.S. industrial footprint.
737 MAX nightmare gets worse
A new problem involving Boeing's (NYSE:BA) grounded 737 MAX has been disclosed after the FAA on Sunday said that more than 300 of that troubled plane and the prior generation 737 may contain improperly manufactured wing slat tracks. While the problem doesn't pose an imminent accident hazard, the planemaker must repair the components - which are prone to cracking - within 10 days. Azerbaijan airline AZAL has also canceled a $1B contract with Boeing (BA) to purchase 10 737 MAX jets "due to safety reasons," following the fatal crashes in Ethiopia and Indonesia.
Strong lithium growth potential lies ahead for Albemarle (NYSE:ALB.)
Italy hopes for compromise with European Commission.
SoftBank (OTCPK:SFTBY) faces challenges raising latest $100B fund.
Carnival (NYSE:) seeks to dismiss Cuba lawsuits after U.S. makes them possible.
Tesla (NASDAQ:TSLA) to make Model Y SUV in Fremont, California.
Macau casinos return to growth in May despite trade war.
China investigates FedEx (NYSE:FDX) over trade war provocation.
Invested in OIL. Are you?
A portion of my net worth I have allocated over seas in an oil and mine refinery. I’m not about to say which one but my partner and I decided to share this information here with you today.
It is worth noting that bond yields are falling on the long end as oil is breaking down, signaling deflation concerns as a result of global macroeconomic weakness which could further effect oil demand in the future. There are still a lot of geopolitical concerns regarding Iran, Venezuela and Libya and supply disruptions can come out of nowhere like the Canadian wildfires several years ago, but as the last 5 weeks have illustrated, some of the bullish sentiment has been taken out of the market. We need to start drawing down oil stocks over this 4-month period. Otherwise, things will get worse before they get better in the oil market.
In our past EIA reports this year, we referenced the fact that the inventory data wasn't matching up to price expectations and the overall bullish sentiment conveyed by energy markets. We further stated that the data was going to have to improve or oil markets were headed for some repricing regarding bullish positioning. Subsequently after the last 6 weeks of EIA reports, and lack of a China trade deal, we are experiencing just that repricing in the oil markets. WTI has pulled back around 10 dollars a barrel over the last 5 weeks, with Brent pulling back almost 9 dollars per barrel. WTI is currently trading around $56.50 a barrel after the latest EIA report on Thursday and looking for support levels.
I might add that weak reports into June are not uncommon, but given the determined emphasis of OPEC and Saudi Arabia in reducing oil exports to the United States, we should have been experiencing much better EIA reports with increased drawdowns during this period if oil markets were as tight as market sentiment believed. Thus, we need to start having some large drawdowns in late June, July. and August or the oil market is going to experience continued weakness going forward. A couple of takeaways right now are that global oil demand isn't as strong as anticipated from a global growth perspective, and the growth in US shale production year over year, means that despite OPEC cuts, there is just too much oil sloshing around the world right now. Furthermore, the oil market covered by the EIA Petroleum Report is not in a net deficit for the first two quarters of 2019. If anything, the EIA Oil internals point to the oil markets being in a surplus, as the most transparent oil market in the world, the focus of OPEC cuts, has noticeably worse internals year over year.
Let us look at the internals of the latest EIA Petroleum Report published on May 30th in which oil inventories fell 0.3 million barrels, basically flat after having previous reports coming in with larger than expected inventory builds. We currently stand at 477 million barrels in storage facilities in the United States and are in a definable uptrend for this metric. A year ago, we stood at 435 million barrels in storage, so this year we are over 9 percent higher in oil inventories. Most of the increase is occurring in the Midwest (PADD 2) and Gulf Coast (PADD 3) storage facilities. In the Midwest, Cushing, Oklahoma, is responsible for 13 million barrels of the nearly 19 million barrels surplus for the PADD 2 region. And along the Gulf Coast there is about 26 million more barrels in storage facilities year over year. Thus, this region which is responsible for oil production and refining and exporting of both oil and products through this logistics supply chain is literally backing up with excess oil so far this year. And I am sure the Trump trade war with China isn't helping this situation as well.
In checking out the oil production numbers, if we take the 4-week averages for data smoothing purposes, we are hanging in there at a robust 12.2 million barrels per day over the last 6 weeks. By comparison, this metric stood at 10.7 million barrels per day of oil production in the United States a year ago. Thus, despite the OPEC cuts, the increase in US production seems to be the cause for the rising oil inventory levels in the Midwest, and the export market isn't robust enough currently to offset this increase in US oil production. The real question here is would this be different if a trade deal with China happened in early January regarding the export's component.
Oil Imports & Refinery Inputs
If we examine the Oil Imports numbers, the 4-week averages are declining from 7.2 towards the 7.0 level over the last 3 EIA reports, and stood at 7.7 million barrels a year ago for this metric. Overall, we can see the effects of the OPEC cuts with about an 8 percent reduction in oil imports year over year. Thus, these oil internals would look a lot worse if it wasn't for OPEC reducing exports to the United States. In reference to the Refinery Inputs number, we are slightly down based upon the 4-week averages at 16.6 million barrels per day, versus 16.7 a year ago.
Now let us look at the gasoline metrics, overall gasoline inventories rose 2.2 million barrels for the week and stand at 231 million barrels in storage. This is around 3 million barrels less than last year currently and represents the strongest part of the energy market this year in terms of tightness. However, this metric has been coming in recently suggesting that even this market is softening right now. We stand around 2 percent tighter than a year ago in gasoline stocks, but were much tighter 6 weeks ago based upon the year-over-year comps, and overall gasoline sentiment by traders in the products market. The Gulf Coast (PADD 3) has about 6 million more barrels in storage versus a year ago, but the East Coast (PADD 1) is starting to build as well. Since this metric has been the strongest in the energy space this year, we will watch this carefully for signaling purposes going forward.
Gasoline Production & Demand
The Gasoline Production numbers are slightly down year over year, about 2 percent lower at 9.95 versus 10.2 million barrels per day in examining the 4-week averages for this metric. The Gasoline Demand number is softer as well coming in at 9.5 million barrels per day versus 9.7 a year ago based upon the 4-week averages for this metric. But overall, gasoline demand is basically in line from a fundamentals standpoint if we compare the trends of the seasonal pickup in demand over the last two years. Thus, we didn't collapse into recessionary levels amid a China trade war, and slowing macroeconomic data points, but we also didn't explode higher as a result of the robust 3.1 percent GDP for the first quarter of 2019. I think the gasoline numbers looked a little better this year due to overall run rates, some export needs, and overall refining strategy more so than increased underlying demand fundamentals in the marketplace.
Distillates Inventories, Production & Demand
We now move to the distillates market where inventories declined by 1.6 million barrels for the week and stand at 125 million barrels in storage. This rounds to a 10 million barrels increase in inventories year over year and represents a 9 percent increase in overall supplies. We stood at a rounded 115 million barrels in storage this time last year, and currently we have 125 million barrels of distillates in storage facilities in the United States. Total Distillate Production came in at 5.19 for the 4-week averages and is slightly higher than this time last year at 5.06, but the weekly distillates production numbers for the last 3 weeks are right in line with last year. There is some variability with the data which is why I compare both the weekly and 4-week averages to examine whether some noticeable divergence is occurring in the comps. At this point, the data is basically in line with year ago levels. In examining Distillate Demand, we come in at 4.02 based upon the 4-week averages for this metric, and a year ago we stood at 4.12 for this number. In referencing both the 4-week averages and the weekly data for the last 3 reports, Distillate Demand is coming in slightly lower than year ago levels, and points to some softness in the market. We will continue to follow this metric as the trade flow data regarding freight and container shipments has shown weakness, much of it attributed to the effects of the China trade war.
It is worth noting that bond yields are falling on the long end as oil is breaking down, signaling deflation concerns as a result of global macroeconomic weakness which could further effect oil demand in the future. There are still a lot of geopolitical concerns regarding Iran, Venezuela and Libya and supply disruptions can come out of nowhere, but as the last 5 weeks have illustrated, some of the bullish sentiment has been taken out of the market. We have had a decline in oil rigs but US production has held firm so far, and a trade deal is still possible over the next 6 months, and there are reports that US shale producers are struggling from a profitability standpoint, so as usual there are a lot of moving pieces to the oil market. But if oil demand growth starts decelerating due to global macroeconomic weakness, and the trade war intensifies with China, this will put further pressure on the oil market. However, we are entering the strongest part of the oil market from a seasonal demand standpoint with an increase in refining utilization rates due to the robust summer driving season so much will be learned about the fundamentals over the next 4 months. But we need to start drawing down oil stocks over this 4-month period. Otherwise, things will get worse before they get better in the oil market.
INTO APPLE STOCK
Despite the fact that Apple, Inc. (AAPL) is already down ~20% this month... it could always go lower. Don't shoot the messenger
To be fair, I am not necessarily suggesting that Apple retests its low of $142.00 from last December, but there are certainly some potential general market headwinds out there (e.g., global slowdown, inverted yield curve, slowing corporate earnings, etc.).
Not to mention the fact that Apple is still right in the crosshairs of the trade war with China.
Now the goal of this article is not to predict exactly how these factors will affect Apple's stock in the coming months. Nor am I going to lay out a bunch of fundamental reasons why the stock should be going higher despite the market's backdrop (there are hundreds of articles out there that already do that.)
That said, my goal for this article is to highlight an alternative way to trade Apple... that can not only reduce your potential downside risk, but can also turn the stock into a true income-generating gem.
Squeezing Income From The Apple
Again, I'm not here to debate fundamentals... but I think most of us can agree that there is a chance that Apple could go lower from here. And I think all of us can agree that a lot of income is always better to have than a little income.
Unfortunately, I can't force Apple send shareholders more of that cash hoard (although that would be really cool!). But I can show you a strategy that I like to use to turn a low-yielding stock into a high-yielding income all-star.
The strategy that I am referring to is called a cash-secured put strategy and it's really simple to implement.
By selling a cash-secured put, you have an obligation to purchase the stock at a predetermined price (strike price) on or before the expiration date (if the buyer of the put option wants to sell you the stock). However, the put seller gets to generate income while mitigating downside price risk. Cash-secured puts essentially act as a limit order for dividend stocks you want to add to your portfolio (but you get paid to put the order in!).
Apple is currently yielding only 1.7%. Obviously, nothing to get excited about from a dividend perspective (especially with more potential downside on the horizon). But we can supercharge that income with a cash-secured put strategy.
As shown in the table below, AAPL is currently trading 7.9% above our Buy Zone of $154.00-$164.00. (I know I said I wasn't going to get into fundamentals, but the Buy Zone equates to roughly 14x consensus forward EPS of $11.45, a 10% discount to Apple's historical trailing P/E ratio).
As such, the July19 $165.00 strike cash-secured put provides a great alternative to buying the stock right now.
The break-even price on this trade (i.e., net purchase price if exercised) is $161.50, which gives us an 8.8% margin of safety below the current price before we would have to purchase the stock.
On top of that, this trade pays a premium yield of 2.2% over 49 days, equating to an annualized yield of 15.9% (or ~9x the annual dividend yield). Assuming the stock price stays above our strike price of $165.00 between now and expiration, we get to keep our 2.2% premium. Then we can rinse and repeat the same process with another option to keep the income stream going and realize an amazing annualized yield.
Our downside is having to purchase the stock at our break-even price. I don't know about you, but I would be happy buying Apple below $162.00 per share right now (so it's kind of a win-win situation).
This sounds like a great risk-reward trade-off to me!
Regardless of the fundamentals, the general market headwinds could send Apple's stock lower. However, a cash-secured put strategy can help reduce that downside risk and squeeze a significant amount of income from the Apple in the meantime!
A NEWS BRIEF 3
President Trump has turned the tariff gun on his southern neighbor, saying the U.S. will impose a 5% levy on "all goods coming into our country from Mexico" from June 10, which will "gradually increase until the Illegal Immigration problem is remedied." The shock tweet sent investors into safe haven assets, with gold climbing back above $1300/ounce, amid fears that another increase in tariffs could tip the U.S., and maybe the whole world, into recession. Along with a fall in global stocks, DJIA futures slid 283 points on the news, while the 10-year U.S. Treasury yield declined 7 bps to a fresh 20-month low of 2.16% and the Mexican peso slipped 2.8% against the dollar.
USMCA hangs in the balance - The fate of the updated USMCA trade deal was thrown into question after President Trump's Mexican tariff threat, making it unlikely that the new version of NAFTA will be ratified this year. Both Canada and Mexico have signaled they are ready to start the approval process, but Mexico may now feel that it's "forced to retaliate" despite being the U.S.'s largest trading partner. American officials have said 80,000 illegal immigrants are being held in custody, with an average of 4,500 arriving daily, overwhelming the ability of border patrol officials to handle them.
More trade war blues - Investing sentiment was also dented by factory activity data from China, which posted a more-than-expected contraction during the month of May amid domestic headwinds and the ongoing U.S. trade dispute. The official manufacturing PMI fell to 49.4 from 50.1 in April, dropping below the critical 50 level that separates growth from contraction. The official non-manufacturing PMI for May was 54.3 - unchanged from the month before.
Pressure on Italy - Italy faces a deadline today to explain its rising debt load, but the country is set to push back, citing near-zero inflation and global trade tensions for its rising debt-to-GDP ratio. As a consequence, the EU Commission will consider launching an excessive deficit procedure, which is likely to be proposed to the college of 28 commissioners on June 5. Deputy Prime Minister Matteo Salvini has also told his Five Star party he's ready to see the governing coalition collapse if he can't push through tax plans.
Billion-dollar loss - It's not too often that a company reports a billion-dollar quarterly loss, and on top of that, sees its shares rise 2%. "Our story is simple. We're the global player," Uber (NYSE:UBER) CEO Dara Khosrowshahi told analysts on a call following the first earnings release since its IPO. "Our job is to grow fast at scale and more efficiently for a long, long time." A statement that Uber will cut back on customer promotions and that marketing expenses as a proportion of revenue should decline soon was also well-received.
Boost for Amazon? - As Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) look to offload Boost Mobile to get their $26B merger over the regulatory line, Amazon (NASDAQ:AMZN) has turned up as an interested buyer of the prepaid service. The deal, which could fetch up to $3B, would allow it to use New T-Mobile's wireless network for at least six years. Amazon has a long history of exploring new ventures and has already been building experience by offering phone calls through its Echo Connect product.
Private ownership - The Trump administration is putting the finishing touches on a plan to return mortgage finance giants Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) to private shareholder ownership. The proposal is expected to include a version of what has been called "recap and release," which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout. If carried out, the companies could return to a status similar to how they operated before the financial crisis.
Georgia boycott - WarnerMedia (NYSE:T), Sony Pictures (NYSE:SNE) and NBCUniversal (NASDAQ:CMCSA) have joined a growing number of major studios - including Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX) - which are threatening to pull their productions out of Georgia should the state's fetal heartbeat bill go into effect. Known as the Hollywood of the South or Y'allywood, Georgia in recent years has become the country's third-largest production hub after Los Angeles and New York, thanks to tax credits of up to 30% it offers to movie and TV production companies. In 2018, the state reported some 92,000 jobs and an economic impact of more than $9B from film productions there.
Intelligence sharing on the line in Huawei rift.
Tesla (NASDAQ:TSLA) promotes lower-priced, China-made, Model 3.
Ahead of possible merger talks, Fiat Chrysler (NYSE:FCAU) CEO sells $3.5M in stock
Altria-backed (NYSE:MO) Juul explores opening e-cigarette stores.
Plant-based meat rage has KFC (NYSE:YUM) consider vegan fried chicken.
GE (NYSE:GE) CEO 'stunned' factory efficiency drive just started.
Carl Icahn sues Occidental Petroleum (NYSE:OXY), opposes 'misguided' Anadarko (NYSE:APC) deal.
A NEWS BRIEF 2
No fake news found here. ??
Investors today will monitor a flurry of economic figures, including the latest weekly jobless claims and a second reading of GDP for Q1, expected to show 3.0% annualized growth compared to 3.2% in the first estimate. Futures are heading higher ahead of the data, following last night's slump that came amid a protracted trade dispute and intensifying yield curve. Contracts tied to the DJIA are now indicating a 75 point advance, while 10-year Treasury notes eased overnight, but at 2.27%, they are still within touching distance of their September 2017 lows.
Ending rare earth reliance - "The Pentagon is working to reduce U.S. reliance on Chinese rare earth minerals after recent trade war threats," according to spokesman Lt. Col. Mike Andrews. The Defense Department is now seeking new federal funds to bolster domestic production, with China accounting for 80% of U.S. rare earth imports between 2004 and 2017. It's not so much about the deposits, but more about their processing. Efforts to build U.S. plants are still in the early stages and lack unified support from Congress and the White House.
New Iranian risks - Escalating the battle over the fate of the Iran nuclear accord, the Trump administration has warned European allies that its vehicle to sustain trade with Tehran, and anyone associated with it, could be barred from the U.S. financial system if it goes into effect. Germany, France and the U.K. created Instex in January to allow companies to trade with Iran without the use of U.S. dollars or American banks - thus allowing them to get around wide-ranging U.S. sanctions.
Trouble in Venezuela - It's the first release of economic data from Venezuela's central bank in nearly four years. Inflation spiraled out of control to 130,060% in 2018 and hit 862.6% in 2017, while the economy shrank 22.5% during the third quarter of 2018 from the same period a year earlier. Oil export earnings last year also dropped 5.6% Y/Y to $29.8B. The government of President Maduro halted the publication of economic indicators in 2015 as the OPEC nation's socialist system began to unravel in response to the global decline in oil prices.
Energy news - ExxonMobil (NYSE:XOM) shareholders rejected a proposal that would have split the roles of the CEO and chairman, and defeated measures that urged the board to create a special committee on climate change. Separately, Delek Group's (OTCPK:DLKGF) Ithaca Energy unit agreed to buy North Sea oil and gas fields from Chevron (NYSE:CVX) for about $2B. Arab leaders are also gathering today in Saudi Arabia for an emergency summit as Riyadh delivers a strong message to Iran that regional powers will defend their interests following this month's attacks on Gulf oil assets.
First earnings since ICO - Uber Technologies (NYSE:UBER) will report its first quarterly earnings since its market debut a few weeks ago. Investors will be looking out for more details on the company's numbers, any indication on future profitability and its strategies after smaller rival Lyft (NASDAQ:LYFT) forecast that its losses would peak this year in its first corporate results as a public company. Ahead of the announcement, Uber inked a partnership with vehicle subscription service Fair to lower the cost of car ownership for its drivers.
More Tesla PT cuts - Tesla (NASDAQ:TSLA) is down another 1%premarket to $188/share after Barclays cut its price target on the stock to $150 (from $192) following the latest comments from Elon Musk. "While our demand is strong, we have a lot of vehicle deliveries to catch up to in order to have a successful quarter," he wrote in a company-wide email reported by multiple media outlets. Barclays analyst Brian Johnson appears skeptical, saying, "Model 3 demand is stagnating in the U.S., the company still doesn't have a path to significant auto profitability and solar storage installations have declined sequentially over the past two quarters."
Down to Georgia- More in the film industry are wading into the fetal-heartbeat bill debate, with Bob Iger saying it would be "very difficult" for Disney (NYSE:DIS) to keep filming in Georgia if it enacts its new abortion law (Black Panther and Avengers: Endgame were filmed in the state). "I think many people who work for us will not want to work there, and we will have to heed their wishes in that regard," he told Reuters. Along with Netflix (NASDAQ:NFLX) "rethinking" its investments in Georgia, at least two projects - Amazon (NASDAQ:AMZN) series The Powerand Lionsgate (NYSE:LGF.A) feature Barb and Star Go to Vista Del Mar - have said they will relocate their productions.
Contributor Renegade Investment Research says Tesla (TSLA) made a 'catastrophic miscalculation.'
High-tech push... McDonald's (NYSE:MCD) opens new Times Square flagship store.
Ahead of its planned IPO, WeWork (VWORK) arranges $2.75B credit line.
Twilio (NYSE:TWLO) takes advantage of stock surge to raise more capital.