Published March 11, 2019
Brazilian private equity firm 3G Capital burst into the United States when it bought well-established food companies Burger King in 2010 and H.J. Heinz in 2013. Its method of operation included cutting costs and executing mass layoffs. 3G attracted the attention of other hedge funds and Warren Buffett’s Berkshire Hathaway. Together, 3G and Buffett bought U.S. ketchup maker Heinz.
In 2015, with Buffett’s help, Heinz acquired and merged with Kraft Foods to create the world’s fifth-largest food company. It was a classic Buffett buy: an easy-to-understand company with iconic American brands, not unlike other long-term Buffett holdings, such as Coca-Cola and Dairy Queen. 3G and Kraft Heinz next attempted to buy Unilever for $143 billion, but that deal collapsed amid concerns about a cultural clash of the two entities.
On Feb. 22, Kraft Heinz disclosed that the U.S. Securities and Exchange Commission was investigating the company’s “accounting policies, procedures and internal controls in procurement.” Kraft Heinz’s share price plunged 27 percent that day; the firm wrote down $15 billion in the value of its Kraft food lines, including Kraft macaroni and cheese, Oscar Mayer hot dogs and other waning brands. […]
Published February 11, 2019
The U.S. has just completed the longest government shutdown in its history. The shutdown came to an end when President Trump backed down from his demand that the government fund his oft promised wall on the southern border of the U.S.
Trump’s “big, beautiful wall” was to be paid for by Mexico. When that didn’t happen, he demanded that the U.S. government pay for the wall. The price tag is estimated at $5.7 billion. When the House of Representatives refused the funding, the president allowed “non-essential” government services not to be funded – an act that he said he was “proud to own.”
After the economy teetered on the brink, the shutdown ended. Government services resumed. Employees, who had not been paid for a month, are in the process of catching up on the work not done during the stoppage. Among the many consequences, the Federal Reserve had to make interest rate decisions at its January meeting without full details of the economy. The Fed wisely decided not to change rates.
Now negotiations are going on within the government as to whether or not the government will pay for the wall. […]
Published January 14, 2019
Over the course of the past year, I have written often of the risk of policy accidents. Since September, two significant policy accidents have created havoc in the financial markets.
First and foremost is the tariff war. Although initiated earlier, the tariff war came home to roost in the fourth quarter of 2018, when tariffs began to have their full impact. Once billed “easy to win” by the president, the tariff war is proving anything but easy. As the impact of the trade war on the global economy became visible and economies began to slow, the prices of equities and commodities fell in concert. Money began to flow from these assets, and markets tumbled.
Then the Federal Reserve made good on its promise to raise interest rates. Chairman Powell promised to raise rates until the Fed charts showed that rates were in the “right place.”
And so, beginning in early September, equity markets tumbled into bear market territory, down about 20 percent. The markets went from optimism to pessimism in a matter of weeks. The yield curve suggested a recession was in the offing. Having predicted 13 recessions – and eight […]
Published December 10, 2018
I have frequently discussed the danger of policy mistakes in this column. This year has seen a plethora of policy mistakes, and they are now coming home to roost. In spite of a strong economy, with growing GDP, full employment and record consumer confidence, the U.S. equity market suffered big losses in October. Since the market normally looks ahead six to nine months, what did it see?
Not to be outdone, U.S credit markets have suffered their worst year since 2008, as investors shed corporate debt. What brought us to this point? Can the mistakes be rectified?
The first policy mistake was by the Federal Reserve. After record low interest rates for a very long time, the Federal Reserve has been on a rate hike trajectory. Ever cautious, Janet Yellen was on a very slow, deliberate, rate-rising schedule. The market did not question the need to raise rates. However, President Trump decided to replace Yellen, reportedly because she was too short at five feet, two inches.
The president handpicked Jerome Powell as his chairman. Powell had a different idea on rate increases; he wanted more and faster increases. The market absorbed […]
Published November 9, 2018
October is a notoriously difficult and volatile month from an investment point of view. This October was no exception, with the market down 6.8 percent on the month – the biggest monthly drop since 2008.
The October effect, according to Investopedia, is a theory that stocks tend to decline during the month of October. It’s considered mainly to be a psychological expectation rather than an actual phenomenon, because most statistics go against the theory.
Some investors may be nervous during October, because that is when some large historical market crashes occurred. They include the Panic of 1907, Black Thursday (1929), Black Monday (1929), Black Tuesday (1929) and Black Monday (1987). The latter crash, which occurred on Oct. 19, 1987 and saw the Dow plummet 22.6 percent in a single day, is arguably the worst single day. (See reference in my book “Who Shot Goldilocks?”) The other black days, of course, were part of the process that led to the Great Depression – an economic disaster that stood unrivaled until the mortgage meltdown nearly took out the whole global economy with it.
The October effect is overrated. Despite the dark titles, this […]
Published October 5, 2018
This column is being written on an unusual day: the same day that the month and quarter end. So it is an opportunity to reflect on the year to date and the previous quarter.
In spite of persistent worries among investors, the third quarter turned out to be quite good. The Dow Jones was up 9.0 percent, the S&P was up 7.2 percent and the NASDAQ was up 7.1 percent.
So far for the year, the Dow is up 7 percent, the S&P is up 9 percent and the NASDAQ is up 16.6 percent.
The market was spurred on by strong earnings and the effects of the tax bill. Earnings last quarter were up 17.9 percent, which is not likely to be repeated. The tax bill led to increases in earnings because of lower taxes and spurred stock buybacks and mergers – all shareholder-friendly activity.
At the same time, the market braved substantial headwinds: interest rate increases, election uncertainty and tariff threats.
Annualized GDP growth was 4.2 percent for the second quarter, with most segments of the U.S. economy posting solid gains. The economy will likely cool going forward, but that may be […]