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Buffett’s Berkshire Hathaway boosted by US economic rebound – Aljazeera.com

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Warren Buffett’s Berkshire Hathaway Inc. is reaping the benefits of the U.S. economic recovery.

The conglomerate’s collection of manufacturers and retailers bounced back during the second quarter after being hit hard as the pandemic ripped through the U.S. last year. That group of businesses posted its second-highest quarterly profit in data going back to the middle of 2009 and helped fuel a 21% gain in Berkshire’s total operating profit during the period.

“It’s all of the other old economy, manufacturing, service, retailing, transportation businesses that just really reflect the broad economic recovery driving this performance this quarter,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview. “There’s a housing angle here which I think was a really strong contributor this quarter.”

Buffett has built Berkshire into a broad business with footholds in industries including insurance, energy and retail. But that exposure to a wide slice of the U.S. economy weighed on it last year with businesses including See’s Candies having to furlough workers at the start of the shutdowns. Now, the outlook appears brighter.

“Many of our businesses generated significantly higher earnings over the first half of 2021 compared to 2020, which included significant adverse effects from the pandemic,” Berkshire said in a regulatory filing Saturday. “Earnings of our manufacturing, service and retail businesses in 2021 benefited from higher customer demand in many of our businesses and exceeded earnings in 2019 as well.”

Berkshire’s group of building-products companies accounted for a particular source of strength during the quarter. Earnings at those operations were up almost 40%, helped by the boon in housing construction in the U.S. Tom Russo, a Berkshire shareholder, said the strength of those businesses combined with the challenge of disrupting them through technology makes them a good part of Berkshire’s composition.

“The businesses have a certain underlying recurrence that I think makes them attractive,” Russo, who oversees $10 billion including investments in Berkshire shares at Gardner Russo & Quinn LLC, said in a phone interview.

What Bloomberg Intelligence Says

“Warren Buffett’s Berkshire Hathaway is on pace for a solid 2H on the back of about 30% operating unit earnings growth in 2Q. This was an easy comparison, but earnings were above 2016-19 averages in all four segments. ”

–Matthew Palazola, a senior industry analyst, and Kylie Towbin, an associate analyst

Still, Berkshire wasn’t immune to the supply-chain pressures that have been a persistent economic theme since the early days of the outbreak. Higher costs for certain materials such as lumber and steel caused some of those operations to ramp up their own prices, Berkshire said.

Not every Berkshire business bounced back fully. Precision Castparts Corp., which makes parts for aircraft and suffered a large writedown last year, reported revenue declines during the period even as earnings climbed slightly due to efforts to restructure the business. And Berkshire warned that supply-chain issues could continue to weigh on that business.

“The Covid-19 pandemic contributed to material declines in commercial air travel and aircraft production in 2020,” Berkshire said in the filing. “While air travel in the U.S. is increasing in 2021, we do not expect significant increases in PCC’s aerospace demand to occur in the near term due to the inventory levels currently within the industry supply chain. Consequently, we anticipate PCC’s revenues and earnings in 2021 will be below pre-pandemic levels.”

Here are other takeaways from Berkshire’s second-quarter earnings:

Buybacks

Berkshire pulled back on one of Buffett’s more heavily used capital-deployment levers in recent years. The conglomerate bought back $6 billion of stock, down from the $6.6 billion repurchased during the first three months of the year, with June being the busiest month for repurchases for the company.

That contributed to Berkshire’s cash pile remaining fairly steady at $144 billion, just slightly below its record size. Buffett has struggled in recent years to find attractive ways to put that money to work, and that continued during the second quarter.

“He’s very price-sensitive about the buybacks,” said Bill Smead, chief investment officer of Smead Capital Management, which oversees investments including in Berkshire shares.

Still, the $6 billion of repurchases was the fourth-highest amount of stock bought back since Berkshire tweaked its policy in 2018. And there are signs the relatively high level of repurchases could continue. Berkshire appears to have bought back at least $1.7 billion of stock from the end of June through July 26, according to the filing.

Stock Sales

Buffett continued to be rather cautious on the U.S. stock market. Berkshire ended up selling $1.1 billion of stocks, on a net basis, during the period, marking its third straight quarter of being a net seller.

The conglomerate is facing even more expensive stock prices as the S&P 500 hit new highs during the quarter. Some of the sales appear to come from a reduction in Berkshire’s industrial, commercial and other stock holdings. The exact investments the company trimmed will appear in a regulatory filing later this month.

“I don’t think stocks are cheap. I think a lot of areas of the market are fully priced or maybe more than fully priced,” said James Armstrong, who manages assets including Berkshire shares as president of Henry H. Armstrong Associates. “There’s no urgency to pile money into stocks that are fully priced or overpriced. So I think you’re just seeing good discipline on Berkshire’s part.”

Car Accidents

Auto insurers have felt the pain from more drivers hitting the road, and Berkshire’s Geico was no exception. The company ended up posting a nearly 70% decline in underwriting profit during the second quarter.

It was hurt by an increase in the frequency of losses and the severity of those claims. The frequency was affected by more drivers getting behind the wheel amid reopenings in the U.S.

“The insurance results were particularly weak,” Cathy Seifert, an analyst at CFRA Research, said. “What we saw from a lot of the carriers was, on a year-over-year basis, the second quarter of 2020, people were on lockdown mode, people weren’t driving, so both frequency and severity were down. Then, we started to see a little bit of a shift. So on a year-over-year basis, claim frequency went up significantly.”

Railroad Gains

Berkshire’s railroad, BNSF, posted record quarterly profit helped by its efforts in the past to boost productivity and the economic recovery.

Freight volumes increased across all of its product categories — consumer, industrial, agricultural and coal. Consumer-product shipping has benefited from e-commerce activity and auto shipments, Berkshire said.

“They reported a pretty strong increase in volumes revenue,” Edward Jones’s Shanahan said. “What is really powerful about the BNSF results is that the margins are really strong.”

(Adds shareholder’s comment in Stock Sales section.)

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A Key Indicator Shows Weakness In China’s Economy – Forbes

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You’d think from the official statistics that China’s economy was on fire. But a key metric indicates there could be trouble ahead for the second largest economy.

On the one hand the Chinese economy is said to have grown at almost 8% in the quarter through July, according to government data. That’s pretty impressive growth even for an emerging market economy like China.

Soft Steel in China

But on the other hand, more recent data shows a troubling weakness in the country’s steel production. It fell 13.2% in August versus the same month a year ago, according to data from the World Steel Association. That really matters because China produces more than half the world’s steel — or almost a billion metric tons in 2019 — much of which is used in the country’s manufacturing and construction industries. In other words, a weakness in steel production is tantamount to an indication of softness in China’s manufacturing and construction base.

Worse, still China is the only country int he top 10 steel producers to see a decline in steel output over the same period. Japan, the U.S. and Brazil all saw double digit increases, according to the World Steel Assn. data.

Deja Vu All Over Again?

I wrote about a more dramatic Chinese steel production slowdown in June 2015, arguing at the time that it likely augured bad economic news for the communist country. Sure enough in August 2015 poor economic news emerged from China sending global markets crashing.

For that reason, investors might want to be cautious about holding stocks with exposure to China such as those in the iShares MSCI China ETF

MCHI
. It’s already down 7% over the year through Friday, according to data from Yahoo.

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Quebec mulling additional support measures for economy: Pierre Fitzgibbon – Montreal Gazette

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The economy minister was in Montreal to introduce projects to brighten up downtown and lure office workers back.

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Quebec will consider unlocking fresh sums to support economic expansion and ensure businesses in downtown cores can survive the pandemic, Economy Minister Pierre Fitzgibbon said.

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Finance minister Eric Girard “is going to do an economic update in November, and we’re working now to see what other programs across all ministries we could tap to continue the relaunch of the economy,” Fitzgibbon said Friday in an interview in Montreal on the sidelines of a business event.

“Perhaps there are other sums out there that we can obtain. The government is quite open to this because all in all, public finances are in a good situation.”

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Quebec on Friday reported a $359-million deficit for the three-month period ended June 30. That’s a 92-per-cent improvement over the $4.74-billion shortfall reported in the same quarter a year ago — right at the start of the pandemic.

Real gross domestic product in Quebec expanded at an annualized rate of 3.4 per cent in the second quarter, topping its pre-pandemic level with the help of strong domestic demand, the provincial statistics institute said Thursday. Investment in machinery and equipment, household consumption and residential construction all posted gains.

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By contrast, GDP for Canada as a whole contracted 1.1 per cent on an annualized basis.

Despite the broad economic rebound, some sectors — such as commercial real estate — are struggling.

Office vacancies in downtown Montreal rose to 13.2 per cent in the third quarter, real-estate firm CBRE said Thursday. That’s the highest level since the fourth quarter of 2004.

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Fitzgibbon was in town Friday at a Chamber of Commerce of Metropolitan Montreal event to introduce eight creative projects selected to brighten up downtown Montreal and lure office workers back.

Provincial financing for the initiative totals $3.1 million, part of a $23.5-million aid package for Montreal’s central business district that was announced in March. All told, Quebec set aside $75 million to help rekindle economic activity in downtown cores across Quebec.

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“The Montreal economy accounts for 57 per cent of Quebec’s GDP, and we cannot let it down,” Fitzgibbon said. “If more money is required, we will do it. At this time, I don’t think we’ll have an issue with money. There are other programs for innovation or creativity that we can put to work. We can take money elsewhere to achieve the same thing.”

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COVID-19 has deprived downtown Montreal of much of its office worker population in the past 18 months. Plans to bring back employees this autumn have recently been put on hold as a fourth wave sweeps across Quebec.

In fact, teleworking’s enduring popularity probably means downtown cores will never be as busy as they were before the pandemic, according to Fitzgibbon.

“We have to admit that many companies are going to favour teleworking, even after health restrictions have been lifted, for reasons such as family-work balance,” the minister said. “That will be a reality.”

And with several downtown-based employers having opened satellite offices in suburbs such as Brossard or Laval during the pandemic, “perhaps we will never have the same density that we had before,” he said.

ftomesco@postmedia.com

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Economy

Bahrain to Double VAT as Economy Recovers from Pandemic – BNN

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(Bloomberg) — Bahrain will double value-added tax to 10% in an effort to boost revenues and curb one of the Gulf’s widest budget deficits as the economy begins to recover from the pandemic, according to an official close to the government. 

The Gulf country decided to raise VAT following a comprehensive spending and revenue review, the official told Bloomberg, as the government looks for ways to rebalance its finances without undermining an economy in recovery mode.

Bahrain is under fiscal strain despite a $10 billion bailout package pledged by its wealthier neighbors in 2018. Last year, it said it was putting some of its reform efforts on hold to focus on helping the economy cope with the double shock of Covid-19 and a fall in oil prices. 

Bahrain Puts Economic Recovery Ahead of Boosting Budget Revenue

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