🎙️ Easy Come, Easy Go

Well, stocks ticked higher Friday to close out a five-day winning streak as investors look ahead to the next easing cycle, which is (presumably) less than a week away.

If/when the Federal Reserve cuts interest rates next week, history shows that easing cycles are more often bullish than bearish for equities, aside from the major bear markets of 2000 and 2008.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Berkshire’s stock is too rich, even Berkshire isn’t buying much

• Why rate cuts can’t come soon enough for the housing market

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

📈 Berkshire Hathaway’s Stock Is So Rich Even Berkshire Is Buying Less

Berkshire Hathaway recently joined the $1 trillion club, which is great news for stock investors. But it also signals that Warren Buffett’s conglomerate is a little pricey. 

Berkshire disclosed that its stock buybacks have slowed dramatically after months of big repurchases. The company buys back stock when Buffett “believes that the repurchases price is below Berkshire’s intrinsic value, conservatively determined.” (Quick refresher: A stock buyback is when a public company uses cash to buy shares of its own stock on the open market.)

Sleep tight: After a powerful rally — 25% this year — Berkshire said it bought back about $345 million of stock in the second quarter, its smallest quarterly repurchase since 2018. In the second half of 2020, the company bought up $9 billion of its stock each quarter. 

• One investment officer described Berkshire as “the ultimate sleep-at-night stock,” thanks to its leader (Buffett), strong balance sheet, and a diversified range of businesses. But many investment officers are emulating Buffett, waiting for a pullback before adding to their positions.
  

• Another investment officer told The Wall Street Journal: “It’s certainly not a screaming buy. We’re not frankly anxious to add a whole lot here.”

Trillion-dollar club: In his letter to shareholders this year, Buffett said that Berkshire’s enormous size, combined with so few attractive businesses to buy, means he has “no possibility of eye-popping performance” anymore. 

Since its inception, shares of Berkshire Hathaway have averaged annual returns of around 20%, roughly double the rate of the S&P 500. That has pushed Berkshire to become the seventh-largest U.S. company by market cap and the first U.S. company not in Big Tech to hit the $1 trillion mark. Apple was first, followed by Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia in that order. 

• Berkshire includes businesses like Geico, BNSF Railway, and See’s Candies. It also has a massive stock portfolio with big positions in Apple, Coca-Cola, American Express, and Bank of America, among other household names.
  

• Investors’ recent optimism for insurance companies has, at least in part, fueled Berkshire’s rally this year. Progressive shares, for example, are up about 57% this year, while Allstate (33%) and Chubb (28%) have also performed well. 

Why it matters:

Berkshire Class B shares traded this week at around 1.45 times their average book value over the next 12 months, above a five-year average of 1.28. 

It’s worth recognizing that high valuations don’t mean a rally will end. Buffett knows as much. Berkshire can continue climbing for months (or years), well above what Buffett and other observers believe is the company’s intrinsic value. But generally, a rich valuation discourages value-oriented investors who follow Berkshire closely. 

• “That tells you a lot too about the valuation if Buffett’s not willing to go out there and buy the stock at these prices,” one stock strategist told WSJ.
  

• Said another: “If Buffett’s not buying his own stock, then why should we?”

Cash is king: Buffett likes stock repurchases because they can help increase shareholders’ ownership of the business, but only if done at the right prices. 

• “What is sensible at a discount to business value becomes stupid if done at a premium,” he wrote in his February letter.
  

• Berkshire has plenty of cash to buy back its stock: $277 billion as of June, thanks to big stock sales, especially of Apple and Bank of America. 

Bottom line: From Buffett's recent actions, we can infer that he probably believes the market is a little expensive right now, including his own company, and that he thinks the best investments are cash and Treasurys. 

Read more

More Headlines

📉 European Central Bank cuts interest rates for second time in three months, lowering key rate to 3.5% from 3.75%

💼 PwC US to cut 1,800 jobs over restructuring, its first layoffs in 15 years

💡 Ajit Jain, Buffett’s insurance leader for nearly 40 years, dumps more than half of Berkshire stake

💰 MicroStrategy’s latest $1.1 billion Bitcoin purchase is largest since 2021

😎 The reasons to feel good about the American economy

🤖 ChatGPT maker says its new AI model can reason and think ‘much like a person’

✈️ Boeing’s US factory workers strike for first time since 2008, halting 737 MAX production, stock now down 37% this year

🏠 U.S Housing Market Awaits Boost After Tough Stretch

Americans could use housing relief. Many renters (about half) spend 30% or more of their income on housing, and the housing market is coming off its worst spring season in 12 years.

Buyers, sellers, and renters alike are hoping the Federal Reserve can pull off a soft landing that keeps the economy on solid footing while dropping rates enough to boost the stalled housing market, which has been stuck in neutral aside from a few outlier counties and sales of homes over $5 million.

• “The good news is that rates will most likely be lower next spring,” noted one head of fixed income strategy. “If rates are lower because the economy is slowing, home prices might get hit by consumer confidence. Then the question is: ‘Do I want to take a bigger mortgage? How stable am I in my job?”

Locking in: Rates on a 30-year fixed mortgage dropped about 160 basis points since this cycle peaked in October 2023. Lower borrowing costs would likely bolster small companies and home buyers alike, easing affordability that drove home sales in April through June to the lowest level since 2012.  

• Spring (and summer) are key seasons for the housing market, thanks to warmer weather and school breaks. But right now, renters are priced out of homeownership (in some markets, starter homes are $1 million), and owners who’d like to move have held off because they’re locked into rates they secured when the cost of capital was much cheaper.
  

• This “lock-in effect” discouraged the sale of roughly 1.7 million homes between the second quarter of 2022 and the second quarter of 2024, WSJ reported.
  

• Big drop-offs were in the once-hot Sun Belt, such as the top 50 U.S. housing markets, such as cities in Florida and Texas, which saw the steepest percentage declines in transactions this spring.

Why it matters:

Rates could end this year at around 6.4% and end at around 5.9% next year. The days of sub-3% might be gone, but one housing economist told Bloomberg that that drop is enough to field housing sales to a “meaningful” degree. 

• “In a soft landing, rates wouldn’t come down that far — that’s the trade,” Keys said. “But the pain of a recession, with a huge increase in unemployment, would be dramatically more painful.”

Policymakers have said they will cut rates, but the degree and over what time frame remain to be seen. According to Freddie Mac, mortgage rates have already dropped to 6.2%, the lowest since February 2023. 

Generation gap: Look, the drop in rates isn’t going to solve the affordability crisis overnight. The high cost of housing is a bigger problem. In cities nationwide, including Phoenix, there’s a generation gap between wealthy Baby Boomers and younger buyers who are priced out. 

However, the rate dip is expected to drive new demand back into the housing market eventually. 

“Once some buyers jump in to take advantage of lower rates, other buyers will follow suit,” another economist observed. “They’ll see more competition, and instead of being hesitant because they expect rates to drop more, they’ll be nervous that they aren’t acting fast enough before prices go up.”

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Quick Poll

On Wednesday, we asked: As CEO of Under Armour, the first thing I'd do is...

— You all offered up some interesting thoughts here: One reader says they would first revamp the product line. “What consumers loved about UA were its high-quality moisture-wicking performance clothes, but over the years garment quality has really suffered, and pieces don’t fit well.” Another reader wrote, “Focus on what made them great; mainly football attire for athletes.”

— Other answers: “Focus on product quality. See Abercrombie come back.” Another: “Rebrand the company. UA is dead amongst most Gen z and Millennials. To have any chance, they must become a luxury brand to rival companies like Lululemon and Vuori. Rename because Under Armour is not cool anymore.” And, “Fire all the consultants and any layers of management that didn’t exist 5 years ago. Go back to basics.”

See you next time!

That's it for today on We Study Markets!

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