Random Thoughts on the Economy and the Stock Market

 *Last week the Commerce Department reported that real GDP increased at a 2.9% annual rate in the fourth quarter. Normally that would represent solid growth, but if we back out trade and inventories, domestic final demand increased at a meager 0.8%. Despite continued sub 200k unemployment claims, we are setting ourselves up for a modestly negative first quarter.

* The White House was really pissed about Chevron's $75 billion share buyback. They explicitly stated "“For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it,” White House spokesman Abdullah Hasan said in an emailed statement. “We continue to call on oil companies to use their record profits to increase supply and reduce costs for the American people.” (Source: Bloomberg) For a White House that believes that fossil fuel generated climate change represents an existential threat to humanity its statement represents the height of hypocrisy. 

* The January rally in the stock market continued last week the the NASDAQ Composite and the S&P 500 now up 11%  and 6%, respectively with January not yet over. My guess is that the bulk, if not all, of the gains are in for the year. 

* The Fed's open market committee meets this week. With stocks rising and housing apparently bottoming out, there is no need for them to even be thinking about a pivot to lower rates. The Fed Funds rate will likely go over 5% and stay there for the balance of the year.

What is Warren Buffett up to?

Warren Buffett's Berkshire Hathaway recently disclosed new positions in Chevron (CVX) and Verizon(VZ), neither of which are typical Buffett investments. These new positions added to already established positions in ABBVIE(ABBV) and Merck(MRK). What do these four positions have in common? Answer: they are all investment grade and they all sport dividend yields at least twice that of the bonds issued by those companies. Buffett is old enough to remember when stock yields were always higher than bond yields in the years before 1957 when share prices were significantly undervalued.

My guess is that Buffett thinks the shares are undervalued, but the real reason for his purchases is that these equities are really bond substitutes for his insurance company subsidiaries (See Table 1 below). Simply put Buffett is asking the question would you rather own, for example, Verizon stock yielding 4.57% with upside potential rather than the Verizon 1.75s/31yielding 2.26% to maturity. It is a no brainer and sooner or later pension fund managers will soon wake up to this fact. One more thing, Berkshire Hathaway benefits from a 50% dividends received tax deduction making the dividends even more attractive.

                                                                    Table 1.

                     Dividend Yield and Yield to Maturity for Selected Buffett Stocks

Company     Div. Yield     Bond Yield     Issue             S&P Rating

ABBV            4.82%          2.16%            1.75s/31        BBB+

Chevron         5.04             1.94                2.23s/30        AA-

Merck            3.57              1.80               1.45s/30         AA-

Verizon          4.57              2.26               1.75s/31         BBB+     

Prices as of 3/2/21 close.