April 17-21, 2023

With record weeks of consecutive stock market gains bearing in mind the recent macro events, Sowell’s technical moving average signals continue to gain strength. Combined with the hopeful sentiment the Fed might pause on rates rising, Sowell’s technical signals rest in neutral position (60/40) but are beginning to lean favorably positive.

Last Wednesday's highly anticipated key CPI rate continued to wane at a yearly 5%, well below the consensus of 5.2%. Producer Prices also eased to an annual increase of 2.7% compared to the previous rate of 4.9%. Equity markets responded favorably to such news, gaining 0.82% for the week, gaining market confidence the Fed is easing. All major economic indicators came in worse than consensus, helping affirm Janet Yellen, Treasury Secretary and Former Chair of the Federal Reserve, quoted on CNN as saying, "Banks are likely to become more cautious in this environment. That does tend to lead to somewhat greater restriction in credit that could be a substitute for further interest-rate hikes that the Fed needs to make." Bond yields, in contrast, widened overall on a softer recession stance towards a soft landing, with the Bloomberg US Aggregate losing 0.48%. Given the current yield curve inversion, any signs of an improving economy, which is a good thing, pose duration and interest rate risk in longer-dated maturities.

With major leading economic indicators finally showing signs of the economy cooling enough for the Fed to possibly pause on raising interest rates, the week ahead will now focus on core earnings and, importantly, forward guidance starting with the financial sector. Major companies from capital markets, asset management, and banks will be reporting, including Bank of America, Bank of New York, Blackstone, Charles Schwab, Goldman Sachs, and State Street. Other industry leaders, including AT&T, JnJ, Netflix, Procter and Gamble, Tesla, TSMC, and United Airlines, will help drive the momentum for the equity markets.

"The urge to participate in something where it looks like easy money is a human instinct which has been unleashed… And people love the idea of getting rich quick. I don't blame 'em. But I've always wanted to get rich slow, and I have a lotta fun along the way." - Berkshire Hathaway Chairman & CEO Warren Buffett, CNBC's "Squawk Box," Wednesday, April 12th, 2023

Berkshire Hathaway Goes Big in Japan

Warren Buffett's Berkshire Hathaway recently acquired stakes in five major Japanese trading companies: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. The acquisition represents a significant shift in strategy for Berkshire Hathaway, which has historically focused on buying stakes in US companies. The move is seen as a sign of Buffett's bullish outlook on the Japanese economy and its trading companies, some of the largest and most influential players in the global commodities market. Buffett has stated that he sees the companies as undervalued and believes they have strong long-term prospects, despite facing headwinds from the COVID-19 pandemic. The acquisition has been well-received in Japan, which is seen as a vote of confidence in the country's economy and trading companies. It is also expected to increase collaboration and investment between Japan and the US, as Buffett's investment is seen as a bridge between the two countries. Going forward, the impact of Buffett's investment is likely to be felt in several ways:

  1. It is expected to boost the trading companies' earnings and share prices, as the investment will give them greater financial flexibility and access to capital.
  2. It will likely encourage other US investors to look closely at Japanese companies, leading to further investment and collaboration between the two countries.
  3. It is expected to help Japan's trading companies to diversify their portfolios and expand into new markets, further strengthening their position in the global commodities market.

Buffett's investment in Japanese trading companies is a significant development for both the US and Japan and is likely to positively impact both countries' economies going forward. With foreigners the most underweight Japan since 2009, it cannot harm having Buffett banging the drum for Japan. His pitch of the trading houses being fantastic asset managers is ironic as the conglomerates were for years disliked for exactly the opposite having fingers in too many pies, not knowing how to manage those pies, and often buying assets at peak prices. There was a saying that if you want something sold, make sure a Japanese trading house is the buyer because they will give you top-of-the-cycle valuations. This is unfair today, as it appears they have sharpened up their act over the past five years to be better managers of their assets, having a greater top-down strategy rather than just buying everything and anything and, importantly, focusing further on shareholder returns. While the 'every 1–2-year euphoria' goes around of what Buffett will buy next in Japan – the belief is that ultimately the latter point is one of the only two reasons he bought these in the first place: 1) secured fixed cheap debt vs. growing dividend, 2) inflation hedges / a view on the commodity cycle. While Buffett can talk up the trading companies' quality as much as he wants, >50% of net income is down to higher commodity prices. The pandemic, under-investment globally in mining, and the War in Ukraine have allowed them to produce excessive free cash flow, which, coupled with trading houses' better understanding of shareholder returns, resulted in dividend hikes and buybacks.

Chart Above: Foreigners most underweight since 2009. Mitsui is now a $48bn market cap monster, going through the cycle uptrends supported by massive buybacks.

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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