Stocks too high? Buffet just bought $23.5B…

Today’s Big Picture

Chip stocks finally caught a break Monday. After eight straight losing days and a 16% slide, the semiconductor index bounced, and the Nasdaq rose 1.1%.

The rest of the market sat it out. At one point, about seven in 10 S&P 500 stocks were down, and the Dow finished slightly lower.

Bond yields didn’t help. The 10-year Treasury yield climbed back to about 5.15%, not far from this cycle’s high of 5.36%, its highest since 2002.

That’s what an expensive market looks like up close. Investors pay up for the few things they trust and get picky about everything else.

When everything looks expensive, the price you agree to pay is the edge.

Even inside Berkshire Hathaway’s portfolio, the steady names are winning. Coca-Cola, the stock Warren Buffett started buying months after the 1987 crash, just passed Alphabet to become Berkshire’s third-largest holding.

Buffett said in May that stocks were too high. Below, Dylan Jovine on why Berkshire has spent billions buying them since, and what it chose.

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52 weeks. 52 Potential paydays.

Most dividend stocks pay four times a year. March, June, September, December. Then weeks of silence.

The team at Investing Daily built a calendar that fills every one of the 52 week-slots in a year. Four monthly payers and three quarterly holdings, sequenced so no week is empty.

Several holdings also pay bonus dividends that cluster in December through February. The same weeks the tax bill and the insurance premium land.

See the full calendar →

Disclosure: Investing Daily is a paid partner of Future Finance. The forecasts, track record and claims above are those of Nathan Slaughter and Investing Daily, and do not represent the view of Future Finance. As always, do your own diligence.

Signal vs. Noise

The Fed Probably Waits. Bonds Aren’t Waiting.

• The noise: traders put the odds of a Fed hike next Wednesday at about one in six, per CME FedWatch.
• The signal: the bond market is doing the tightening anyway. The 10-year yield rose to about 5.15% Monday, and the two-year to about 4.77%.

Traders still expect a hike, just later. A Reuters tally of FedWatch data last week put the odds of a move by December at 89.5%.

For beginners: mortgage rates, car loans and business borrowing track these yields more than the Fed’s own rate. When the 10-year rises, money gets more expensive whether the Fed moves or not.

Oil Hit $110. One of Berkshire’s Stocks Hit a Record.

• The noise: Brent crude dipped Monday, to $109.55 a barrel, after President Trump eased some sanctions on Russian energy.
• The signal: the supply problem hasn’t gone away. Iran’s Revolutionary Guard said a tanker hit a mine in the Strait of Hormuz, and Brent touched $110 on Friday for the first time since May.

Iran’s offer to reopen the strait is still on the table, but only on its conditions.

Someone is getting paid. Chevron closed at a record Friday, up almost 36% since early July. Berkshire owns about $19 billion of it.

For beginners: high oil is a cost for most companies and a windfall for a few. Owning some of the few is one way to soften the blow.

Netflix Cut 1,000 Jobs. Tonight It Has to Explain Why.

• The noise: Netflix announced last week it was cutting about 1,000 jobs, roughly 6% of its staff.
• The signal: the same memo said the company “remains on track to deliver our full year forecast.” Cutting costs while promising growth puts the spotlight on profit margins tonight.

Wall Street expects 82 cents a share on $12.88 billion of revenue, right in line with Netflix’s own guidance. The stock is down about 25% this year, and it has fallen after each of its last five reports.

It also has a new content chief, Peter Rice, who starts Oct. 26.

Options traders are bracing for a move of about 9% either way.

For beginners: when a stock has been punished this hard, “in line” can be enough for a bounce. What moves it is the outlook for next year.

Featured Contributor

Today’s guest is Dylan Jovine of Behind the Markets, who wrote here Monday about SpaceX seeking $40 billion in debt to buy AI chips. Over nearly three decades on Wall Street he founded the brokerage and investment bank Lexington Capital Partners at 24, then built his research firm Tycoon Publishing to more than 500,000 readers across 28 countries before selling it to Agora in 2011. Nothing here is a recommendation. 

His piece first ran Monday; we’ve checked it against Berkshire Hathaway’s SEC filings and reporting by CNBC and Reuters.

Nothing here is a recommendation.

Buffett Called Stocks Too High. Then Berkshire Spent $23.5 Billion Buying Them.

On May 2, at Berkshire Hathaway’s annual meeting, CNBC’s Becky Quick asked Warren Buffett whether stock prices were too high.

His answer was one word. “Yeah.”

Then he went further, saying prices for “a lot of things will look very silly,” per CNBC’s interview.

That was the warning. Now look at the receipts.

In the second quarter, Berkshire sold just $3.7 billion of stocks and bought roughly $23.5 billion, per its filings. About $17 billion of that was Alphabet.

That made Berkshire a net buyer for the first time in 14 quarters, per Kingswell. Three and a half years of selling, over.

The buybacks tell the same story. After repurchasing just $235 million of its own stock in the first quarter, Berkshire bought back $4.5 billion in the second.

The famous cash pile fell to $364.7 billion from $380.2 billion, its first meaningful drop in years, per Reuters.

So who’s doing the buying?

Not the man who gave the warning.

Buffett handed the CEO job to Greg Abel in January. He’s still chairman.

In his last few years as CEO, Buffett sold about three-quarters of Berkshire’s Apple stake and about half of its Bank of America stake. Abel ended the selling streak in his first two quarters.

And the buying hasn’t stopped. In June, Berkshire put $10 billion into an Alphabet private placement, at prices set in advance. That briefly made Alphabet its third-largest holding, until Coca-Cola reclaimed the spot this month.

Berkshire also bought $600 million of Bending Spoons at its July IPO and added $330 million more this month, at $33 a share, per the company.

My read: this isn’t Berkshire calling Buffett’s warning wrong. It’s Berkshire agreeing with it.

Buffett said “a lot of things” will look silly. He never said all things.

Look at what Abel bought. Berkshire’s own shares, at roughly 1.4 times book value by our estimate. The stock trades around 1.5 times book now. He bought the dip, not the rally.

And before anyone calls this a bottom signal, check the scale. $23.5 billion sounds enormous. Next to $364.7 billion in cash, it’s about 6 cents on the dollar. Berkshire waded in. It didn’t dive.

The S&P 500 is up about 6% since Buffett’s warning.

So the old chief told you prices look silly. The new chief is showing you which ones aren’t.

When the world’s most patient seller starts buying again, don’t ask if he changed his mind. Ask what he found.

Speaking of what people find. Near the Grand Canyon, a drilling crew hit a clean energy well producing almost eight times the output of Saudi Arabia’s largest oil well.

It’s the one energy source Washington left its tax credits on when it cut them for solar, wind and EVs. Google has signed on, and Bill Gates has written a $100 million check.

Today, 83 parcels of federal land go up for auction, and I’ve found the one company that owns the entire chain. Get the name and ticker before the auction here.

- Dylan Jovine

Behind the Markets

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Google signed on. Bill Gates wrote a $100 million check.

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One company owns the entire chain.

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Disclosure: Behind the Markets  is a paid partner of Future Finance. The forecasts, track record and claims above are those of Dylan Jovine and Behind the Markets, and do not represent the view of Future Finance. As always, do your own diligence.

Final Thought

In August, Frank Curzio walked us through the advice Charlie Munger gave Buffett: buy wonderful businesses at fair prices.

Berkshire’s new boss seems to have taken it to heart. Alphabet at a price agreed in advance. Its own stock at a discount to what it thinks it’s worth. A new listing at $33 a share.

And while it waits, the rest of the cash isn’t idle. At today’s Treasury bill rates, roughly $360 billion earns somewhere around $15 billion a year, by our math.

That’s the luxury of patience when cash pays 4%. You don’t have to buy what everyone else is buying. You can wait for the price you want.

Netflix reports tonight, and Meta and Tesla follow tomorrow. We’ll go through what they said and what it means for your money.

See you tomorrow.

- Rami Al-Sabeq

Editor in Chief | Future Finance

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Disclaimer: This content is not financial advice, it is for informational purposes only. All investments involve inherent risk. Any financial decisions you make are solely your responsibility.