Market Insights: Buffett is Buying

Macroeconomic and Market Developments:

• North American markets were volatile, but ultimately end up only slightly lower this week. In Canada, the S&P/TSX Composite Index was down 0.62%. In the U.S., the Dow Jones Industrial Average was declined 0.24% and the S&P 500 Index fell 0.21% this week.
• The Canadian dollar was down this week, closing at $77.45 vs $77.75 cents last Friday.
• Oil prices were positive this week. U.S. West Texas crude closed at US$110.37 vs $104.69 last Friday, and the Western Canadian Select price closed at US$96.41 vs $91.64 last Friday.
• The gold price declined slightly this week, closing at US$1,883 vs $1,897 last Friday.
• The big driver in the markets this week was the U.S. Federal Reserve meeting and announcement on Wednesday. The central bank announced that they are raising the overnight lending rate by 0.50% and beginning the process of reducing the size of its balance sheet holdings, both moves representing an effort to slow down the economy and ease inflation pressures. At first, the markets rallied strongly, finishing up on Wednesday. However, the mood changed dramatically on Thursday with the S&P500 down 3.56% and the tech heavy NASDAQ down 4.99% on the day.
• The annual general meeting for Warren Buffet’s Berkshire Hathaway took place last weekend in Omaha, Nebraska. Buffett revealed that Berkshire Hathaway bought roughly $41 billion worth of stocks as equity prices fell over the first quarter, including $3.2 billion of its own shares, shrinking the company’s cash balance from $147 billion to $106 billion. Berkshire’s biggest move was adding to its Chevron position, increasing its investment to $25.9 billion at the end of March from its value of $4.5 billion at the end of 2021. More on this later in our Charts section.
• The U.S. ISM Manufacturing Index slowed to 55.4 in April, much lower than the expected 57.6 (levels higher than 50 signal expansion; levels below 50 signal contraction). The major measures of activity were mostly lower in April, but all stand above 50, signaling growth. The production index fell to 53.6 from 54.5 in April, while the new orders index declined to 53.5 from 53.8.
• The U.S. ISM Non-manufacturing (services) Index also slowed in April, dropping to 57.1, which was also lower than the expected 58.5. Most measures still stand above 50. The business activity index rose to 59.1 from 55.5, while the new orders index dropped to 54.6 from 60.1.
• Calgary’s MEG Energy (MEG) reported better than expected and record cash flow of $1.87/share vs the expected $1.80/share, with earnings of $1.15/share vs $1.04/share forecast, as well as production of 101.1 Mboe/d which was above the 99.9 Mboe/d forecast. Total capital expenditures of $88 million was lower than the expected $100.7 million, which was primarily directed towards sustaining and maintenance activities.
• Canadian Natural Resources (CNQ) reported better than expected adjusted funds flow of $4.21/share vs $4.03/share expected, and earnings of $2.86/share vs $2.44/share expected. Production was better than forecast at 1,280.2 Mboe/d vs 1,275.6 Mboe/d expected and capital expenditures came in lower than forecast at $844 million vs $1.04 billion expected.
• Canada's trade surplus narrowed to $2.5 billion in March, down from an upwardly revised $3.1 billion in February. However, both imports and exports hit record highs, with stronger crude prices giving exports a boost.
• Employment numbers for April were released on Friday. In Canada, the economy added 15,300 jobs last month, much lower than the 40,000 gain anticipated by economists. The Canadian unemployment rate fell to 5.2% in April -- a record low in data going back to 1976. In the U.S., nonfarm payrolls grew by 428,000 for April, slightly above the estimate of 400,000. The U.S. unemployment rate held at 3.6%, with economists having expected the rate to drop to 3.5%.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled We Use Our Indicators for a Reason: DWYER VLOG

Weekly Diversion:

For all you Game of Thrones fans, there is a new trailer out for the prequel House of the Dragon coming out this summer.

Charts of the Week:

It has been a very difficult stretch for both equities and bonds this year; in fact, it is one of the worst starts to a calendar year on record for both. Since many market participants look at this calendar year as a separate entity from a very strong 2021, the correction can certainly feel amplified. However, in the context of corrections, so far the level has actually been normal, exactly at the average of all maximum intra-year drawdowns (red dotted line: -13.6%) for the S&P 500 as of the end of last week. This certainly doesn’t mean the correction is over, but it helps put the current one in better context than simply referring to how the markets have performed since January 1. Since 1950, the S&P 500 has posted positive returns in 56 of those 71 years which is almost 80% of the time. The average annual maximum drawdown of -13.6% is the measurable pain that investors must pay for the upside over the long-term.

Source: Purpose Investments, Standard & Poors

This week, we wanted to highlight what one of the best investors in the world for a long time, Warren Buffet, is doing right now. Warren Buffett is one of the wealthiest people in the world and the head of Berkshire Hathaway, a US$705 billion market cap holding company that owns significant positions in public and non-public companies in varying sectors. So far this year, the S&P 500 hit a low on March 8th, then rallied back into late March, and now recently has fallen back to test those March lows. When markets were rallying strongly last year, everyone loved stocks and wanted to buy, but after the markets have had a significant decline, those same investors can’t get out fast enough. While those investors were selling in March, Berkshire was buying heavily. As the chart below shows, Berkshire acquired a net US$41.5 billion dollars worth of equities during the first quarter with a peak purchase date of March 4th (US$4.6B). Their recent annual meeting shows that about 80% of these purchases occurred during the volatile three-week period as shown in red below when stock markets were bottoming on a short-term basis. It is often said that the stock market is one of the only places where investors don’t like bargains. When markets were going higher, everyone was lined up to buy last year at more elevated levels, only to then sell at depressed levels. It is also said during volatile periods like the present, money shifts from weak hands (retail investors) to strong hands (institutional investors). Buffet is one investor who has bucked the conventional approach of many investors and consistently has used weakness as an opportunity. This is likely one of the key reasons why we saw the rally off that early March low, with institutions stepping in at those levels. The rally has since pulled back, but these same institutions could view this same level as an area of opportunity, and as a result, support for the market. One of Buffet’s famous quotes is: “Be fearful when others are greedy. Be greedy when others are fearful.”

Source: Bespoke Investment Group

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, Purpose Investments, Standard & Poors