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Buffett's chance for a blockbuster deal faded as Fed stepped in – BNNBloomberg.ca

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Warren Buffett struck some of his famous deals — taking lucrative stakes in Goldman Sachs Group Inc. and General Electric Co. — by swooping in when others panicked during the last financial crisis. He’s treading more carefully this time around.

With a record US$137 billion of cash piled up at his Berkshire Hathaway Inc., Buffett fielded questions over the weekend from shareholders who wanted to know why he hadn’t acted as companies clamored for liquidity amid the pandemic-related shutdowns. This crisis is different, Buffett said.

“We have not done anything because we don’t see anything that attractive to do,” Buffett said at his annual shareholder meeting, which was held by webcast. The deals in 2008 and 2009 weren’t done to make “a statement to the world,” he said. “They seemed intelligent things to do and markets were such that we didn’t really have much competition.”

The famous investor’s reputation allowed him to serve as a lender of last resort during the 2008 financial crisis, racking up deals that generated 10 annual dividends from household-name companies. But as panic about the virus and shutdowns assaulted equities in March and even began to freeze debt markets, the Federal Reserve beat him to the punch with an unprecedented set of emergency measures.

“There was a period right before the Fed acted, we were starting to get calls,” Buffett said at Saturday’s meeting. “They weren’t attractive calls, but we were getting calls. And the companies we were getting calls from, after the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given.”

Buffett’s cautious reaction to the latest crisis drew plenty of attention from investors. While Berkshire bought back US$1.7 billion of its shares in the first quarter, it was a net seller of stocks through April as it shed stakes in four major U.S. airlines.

The approach seems to put him in the camp of other notable investors who think markets may not have seen the worst of the impact from the pandemic. Buffett said the prospect of buying back Berkshire’s own stock isn’t much more attractive than it was in January, even as the share price dropped.

“He received much more demanding questions,” said Tom Russo, who oversees investments including Berkshire shares at Gardner Russo & Gardner LLC.

The sale of stakes in Delta Air Lines Inc., Southwest Airlines Co., American Airlines Group Inc. and United Airlines Holdings Inc. continues Buffett’s tumultuous history with the industry. He swore off the sector years ago after a troubled bet on USAir, then in 2016 he dove back in. In March, he told Yahoo Finance that he wouldn’t be selling airline stocks.

“Well, he just rejoined Airlines Anonymous,” said Bill Smead, chairman and chief investment officer of Smead Capital Management, which owns Berkshire shares.

Buffett, Berkshire’s chairman and chief executive officer, gained fame for turning a struggling textile company into a conglomerate now valued at US$444 billion. But as Berkshire swelled in size, the billionaire investor struggled to supercharge its growth amid soaring valuations in the recent bull market. That’s weighed on Berkshire’s stock price, as the Class A shares fell 19 per cent this year, more than the 12-per-cent decline in the S&P 500 Index, and have trailed the benchmark’s returns over the past decade.

In the meantime, Berkshire’s companies keep throwing off earnings, building the US$137 billion cash pile that’s equal to nearly 31 per cent of Berkshire’s market value. Buffett acknowledged that Berkshire doesn’t need that much on hand, adding that he still aims to keep his company as a “Fort Knox,” stout enough to weather the pandemic.

Buffett said he couldn’t promise Berkshire would outperform the S&P over the next decade, but he could vow not to be reckless. Maintaining that discipline is gratifying to longtime investors, said James Armstrong, who manages money, including Berkshire shares, as president of Henry H. Armstrong Associates.

“He bears a lot of responsibility and he never has any trouble remembering that Berkshire isn’t his,” Armstrong said. “Despite the criticism in the press and the public eye that he should deploy that cash, he continues to, every day, make his calculation of price to value and say, ‘I either see a good investment or I don’t.”’

Berkshire’s meeting lacked the familiar presence of his longtime business partner, Charlie Munger, as well as the thousands of audience members who normally attend the event in Omaha, Nebraska. Buffett said that Munger, 96, was still in fine health, but it didn’t make sense for him to travel from California or to have another vice chairman, Ajit Jain, come in from the East Coast in this age of social distancing.

Buffett, 89, instead was joined by a top deputy who lives just hours from Omaha, Greg Abel. A vice chairman overseeing the non-insurance units, Abel is considered a candidate to take over the CEO job someday. While Buffett still dominated the time, Abel spoke up about incoming calls before the Fed acted and gave investors a taste of his leadership style and his knowledge of Berkshire’s varied operations.

Buffett’s businesses haven’t been spared the effects of the shutdowns. The railroad BNSF reported reduced volumes as COVID-19 disrupted commerce, while footwear and apparel businesses were hit with a 34-per-cent decline in first-quarter earnings.

Munger said earlier this year that some small Berkshire units might not reopen after the pandemic. Buffett clarified the point, saying Berkshire was never willing to prop up a business amid unending losses. “There are businesses that were having problems before and that have even greater problems now,” he said.

Buffett remains cautious about the current crisis, saying that the range of economic possibilities was “extraordinarily wide.” Still, he ended the meeting on his classic optimistic note that people should never bet against America. And he left open the possibility that Berkshire’s dealmaking days will return.

The panic in markets “changed dramatically when the Fed acted, but who knows what happens next week or next month or next year? The Fed doesn’t know. I don’t know and nobody knows,” Buffett said. “There’s a lot of different scenarios that can play out. And under some scenarios, we’ll spend a lot of money. And under other scenarios, we won’t.”

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GM to recall about 7 million pickups, SUVs for faulty air bag inflators – CBC.ca

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General Motors will recall about seven million big pickup trucks and SUVs worldwide to replace potentially dangerous Takata air bag inflators.

The announcement came Monday after the U.S. government told the automaker it had to recall six million of the vehicles in the U.S.

GM says it will not fight the decision, even though it believes the vehicles are safe. It will cost the company an estimated $1.2 billion US , about one third of its net income so far this year.

The automaker had petitioned the agency four times since 2016 to avoid recalls, contending the air bag inflator canisters have been safe on the road and in testing. But the National Highway Traffic Safety Administration (NHTSA) on Monday denied the petitions, saying the inflators still run the risk of exploding.

Owners complained to the NHTSA that the company was placing profits over safety.

Exploding Takata inflators caused the largest series of auto recalls in U.S. history, with at least 63 million inflators recalled. The U.S. government says that, as of September, more than 11.1 million had not been fixed. About 100 million inflators have been recalled worldwide.

27 deaths worldwide

Takata used volatile ammonium nitrate to create a small explosion to fill air bags in a crash. But the chemical can deteriorate when exposed to heat and humidity, and they can explode with too much pressure, blowing apart a metal canister and spewing shrapnel.

Twenty-seven people have been killed worldwide by the exploding inflators, including 18 in the U.S.

Monday’s decision by NHTSA is a major step in drawing the Takata saga to a close. It means that all Takata ammonium nitrate inflators in the U.S. will be recalled, NHTSA said. Earlier this year the agency decided against a recall of inflators with a moisture-absorbing chemical called a dessicant. NHTSA said it would monitor those inflators and take action if problems arise.

GM will recall full-size pickup trucks and SUVs from the 2007 through 2014 model years, including the Chevrolet Silverado 1500, 2500 and 3500 pickups. The Silverado is GM’s top-selling vehicle and the second-best selling vehicle in the U.S. Also covered are the Chevrolet Suburban, Tahoe and Avalanche, the Cadillac Escalade, GMC Sierra 1500, 2500 and 3500, and the GMC Yukon.

It took the agency more than four years to arrive at its decision, which comes toward the end of U.S. President Donald Trump’s four-year term.

NHTSA said in a prepared statement that it analyzed all available data on the air bags, including engineering and statistical analyses, aging tests and field data.

“Based on this information and information provided to the petition’s public docket, NHTSA concluded that the GM inflators in question are at risk of the same type of explosion after long-term exposure to high heat and humidity as other recalled Takata inflators,” the agency said.

Declared defective

The company has 30 days to give NHTSA a proposed schedule for notifying vehicle owners and starting the recall, the statement said.

GM said that although it believes a recall isn’t warranted based on the factual and scientific records, it will abide by NHTSA’s decision.

Spokesman Dan Flores said Monday that none of the inflators have blown apart in the field or in laboratory testing. But he said GM wants to avoid a drawn-out fight with the government.

“Although we are confident that the inflators in the GMT900 vehicles do not pose an unreasonable risk to safety, continue to perform as designed in the field and will continue to perform as designed in line with the results of our accelerated aging studies, we will abide by NHTSA’s decision to maintain the trust and confidence of customers and regulators,” he said in an email.

In a 2019 petition to NHTSA, GM said the inflators were designed to its specifications and are safe, with no explosions even though nearly 67,000 air bags have deployed in the field. The inflators, it said, have larger vents and steel end caps to make them stronger.

But Takata declared the GM front passenger inflators defective under a 2015 agreement with the government.

In its petition, GM said that Northrop Grumman tested 4,270 inflators by artificially exposing them to added humidity and temperature cycling, and there were no explosions or abnormal deployments.

However, NHTSA hired air bag chemical expert Harold Blomquist, who holds 25 air bag patents, to review the data, and he concluded that the GM air bags were similar to other Takata inflators that had exploded.

Test results for the GM inflators included abnormally high-pressure events “indicative of potential future rupture risk,” NHTSA said in documents. “These findings illustrate that GM’s inflators have a similar, if not identical, degradation continuum” to other Takata inflators that have exploded, the agency wrote.

Flores said GM already has purchased 1.6 million replacement inflators made by ZF-TRW that do not use ammonium nitrate.

‘Unexploded hand grenade’

Jason Levine, executive director of the nonprofit Center for Auto Safety, which opposed GM’s petitions to avoid recalls, said it’s a good day for millions of GM owners who had to wait four years for a decision on “whether they are driving with an unexploded hand grenade in their steering wheel.”

Shares of GM rose nearly 3 per cent in Monday morning trading to $44.21. The company said the recalls will be phased in based on replacement inflator availability, and will cost $400 million this year.

Drivers can check to see if their vehicles have been recalled by going to nhtsa.gov/recalls and keying in their 17-digit vehicle identification number.

The previous Takata recalls drove the Japanese company into bankruptcy and brought criminal charges against the company. Eventually it was purchased by a Chinese-owned auto parts supplier.

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Market Crash Alert: What Goes up Must Come Down – The Motley Fool Canada

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Investing in stocks has risks, because the market is never predictable. If you can transfer people’s day-to-day behaviour or routine to the stock market, then everyone would be rich. Unfortunately, it won’t happen. The only sure thing is that prices will rise and fall.

Innate behaviour of the stock market

Stocks behave depending on emerging or prevailing market or business environments. Since the market comes in cycles, traders rely on trends or patterns to make profitable investments. The key to successful stock investing is the execution of the strategy, although it’s not easy.

You must also understand that during a cycle, some asset classes will perform better than others. For example, the energy sector is in a rut at present because of low oil prices and weak demand. Investors stay away from energy or oil stocks because of elevated volatility. The same goes for airline stocks.

When oil prices begin to surge, along with demand, it will start a new cycle. In such a case, you follow the golden rule: buy low and sell high. Investors will follow the trend and ride on the momentum. As energy stock prices rise, investors will profit take at some high point.

TSX rally

The pandemic triggered a stock market crash in March 2020, causing a market-wide carnage. The S&P/TSX Composite Index saw its biggest one-day drop since 1940. On March 12, 2020, the TSX fell 12.34% from 14,270.10 to 12, 508.50. Canada’s main stock market sunk further a week later to 11,228.50.

However, the bloodletting did not last long, as a bull rally ensued. On November 18, 2020, the TSX finished at 16,889.80, or a +50.42% climb from its COVID-low. It has recovered from the losses and is down by only 1.02% year to date. Of the 11 primary sectors, five are in positive territory and six remain in the red.

Thus far, the top three performing sectors are information technology (+38.05%), materials (+16.83%), and industrials (+13.05%). The energy sector is the worst performer with its -44.02% loss.

Bucking the pandemic

If you’re wary of the present market uncertainty, North West Company (TSX:NWC) is proving to be irrepressible and pandemic-resistant in 2020. Investors in this consumer-defensive stock are winning by 25.31% year to date. Likewise, its 4.35% dividend yield should be safe and maintainable, given the 57.39% payout ratio.

This $1.6 billion Canada-based multinational grocery and retail company serves communities in extreme geographies. It has a monopoly of the markets. Even an e-commerce juggernaut is hardly a threat.

You can find North West stores in underserved rural communities and urban neighborhoods in northern Canada, western Canada, rural Alaska, the South Pacific islands, and the Caribbean. Customers in these markets can buy a broad range of products and avail of various services. The highest preference, however, is food.

If you were to invest today, the share price of $32.84 is a good entry. Analysts forecast the stock to climb further by 15.71% to $38 in the next 12 months.

Reversible trend

Expect the TSX to get hotter once the availability of the COVID-19 vaccine becomes a certainty. However, don’t get too excited, as rising infections and a return to lockdowns could reverse the trend.

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Bank of Canada deputy downplays risks of consumer default wave – BNN

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The massive policy response from the Bank of Canada and the federal government successfully prevented the country’s financial system from buckling, though vigilance is still needed, according to a top central banker.

Signs of overwhelming financial strain are few, and the risk of a wave of consumer defaults seems low, Deputy Governor Toni Gravelle said in remarks via video conference to the Autorite des marches financiers. Almost all of the households with expired debt deferrals have resumed repayments, and government measures are helping businesses in many sectors manage cash flows, he said.

“We have long warned that a recession could create broad stress across the financial system,” Gravelle said in a semi-annual update on vulnerabilities in the financial system. “Yet, despite the devastating economic impact of the pandemic, this risk has not — as of yet — materialized.”

The speech paints a reassuring picture of Canadian consumers and companies emerging from the unprecedented shock in decent shape, in spite of elevated debt levels. It also casts the central bank’s own response as largely successful in averting the worst effects of the crisis, though Gravelle said the pandemic remains a source of “considerable financial system risk.”

The deputy governor downplayed signs of overheating in the nation’s housing market, hinting the recent surge in prices reflects fundamental factors such as pent-up demand and a shift in preferences to larger homes. Values have risen fastest, meanwhile, in cities with moderate mortgage levels.

“To this point, we do not see signs that home prices are rising due to speculation, like we saw in the greater Toronto and Vancouver areas a few years ago,” he said. At the same time, he cautioned about the need to be vigilant in certain segments of the market such as condos.

Gravelle added, however, that it’s too soon to declare victory, in particular because many mortgage deferrals only ended in October, meaning the full effects may not be known until the end of the year or early 2021.

He was less sanguine on the prospects for business, which he said may need more financing in the near term to get through a bumpy recovery. That’s why the central bank is ready to support the financial system if needed, even though it has recently pulled out of some programs.

“We expect that an increasing number of businesses will need financing in the coming quarters to get by,” he said. “Staff will be conducting simulations using firm-level data to quantify this, and we plan to publish those results in the next couple of months.”

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