April, Near-Term Slowdown - Weekly Blog # 731
Summary
- While the two more senior historic indices have not confirmed a bear market, retail sentiment for the next six months is extremely bearish.
- The American Association of Individual Investors' (AAII) latest weekly survey summary indicates a 59.4% bearish view. There were 989 new lows for the week on “the big board” and 1570 on the NASDAQ.
- With short-term rates rising, borrowing costs have risen sharply and apparent levels of liquidity are drying up.
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April’s Bear Market
Our last blog labeled the three most popular US stock indices with their media pundit titles, which now need to be revised based on this week’s performance. Using the size of the drop from previous high points:
| DJIA | -10.39% Correction |
| S&P 500 | -13.82% Correction Continued |
| NASDAQ Composite | -24.18% Bear Market* |
*From 11/12/21 Peak
While the two more senior historic indices have not confirmed a bear market, retail sentiment for the next six months is extremely bearish. The American Association of Individual Investors' (AAII) latest weekly survey summary indicates a 59.4% bearish view. This is the deepest bearish percentage I remember. (As a contrarian who is often premature, I am looking forward to a rising market in the indefinite future.) There were 989 new lows for the week on “the big board” and 1570 on the NASDAQ. Investors should be alert to sharply rising stock prices the morning after a down day, where over-leveraged short positions were liquidated by custodians.
With short-term rates rising, borrowing costs have risen sharply and apparent levels of liquidity are drying up. Toward the end of the month, a number of major companies reported earnings that were disappointments. This was due to lack of demand, excess inventory, supply shortages, and an unfavorable mix of workers with questionable skills and attitudes willing to work. Returning to the office is proving to be more difficult and expensive than many thought. No wonder many viewed April as a bad month.
Berkshire Hathaway - Annual Meeting, 1st Quarter, And Best Portfolio Analysis Lab
Berkshire (BRK.A, BRK.B) hosted its first physical annual meeting in three years, publishing its first-quarter report and providing insightful portfolio analysis. I regularly attend the annual conference, both as a portfolio manager of accounts owning positions in the Berkshire and personally as a long-term shareholder. The following are briefs of those views:
- The long-expected transition is underway, from an exclusive focus on speaking roles by Warren Buffett and Charlie Munger to speaking roles by the two Vice Chairs. Additionally, there was the election of a couple of younger directors.
- The leadership of value-oriented stocks is slowing on a relative basis. In the first quarter, insurance operations and their investments produced poorer results. However, it was expressed that results would be better in the future based on greater use of technology and better training. Furthermore, the railroad needs to improve its results through better training and the possibility of only engineers on trains. While the remainder of the operations also produced acceptable results, some operations experienced supply shortages and slower sales than expected. It would not surprise me that some activities over-inventoried, which led to first-quarter sales being less than planned. Perhaps as a result, there were no stock buybacks in the month of April.
- Not surprisingly, investment losses were reported in the first quarter. As a partial offset to these declines, Warren Buffett purchased 9.5% of Activision (ATVI) for the company in an arbitrage operation. (The significance of this is that it was a replay of a formerly regular activity.)
- In a recent fund manager’s survey, the majority of portfolio managers favored value-oriented securities or loans for the rest of this year. The very current experience at Berkshire does not vigorously support the idea.
My personal conclusion is that Warren Buffett and Charlie Munger are managing the company as if it were a Trust for their and other long-term individual shareholders’ heirs, making Berkshire Hathaway a perfectly sound holding but not necessarily attractive as a new position.
Questions: Do any of these thoughts suggest different investment strategies to you?
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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