💰 5 Fact Friday: Is Buffett Passing the Torch?

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Hey Money Maniacs,

Welcome back! Let’s get into this week’s biggest stories in the world of money.

Today’s issue covers:

1. Bad News Is Still Good News 😵‍💫

2. Buffett Prepares To Pass The Torch 🥲

3. Buffett and Druckenmiller Trim Tech Holdings 👀

4. Rate Cutting Abroad Continues 🌍

5. Fat Profits From Fat Loss Pills 💸

1. Bad News Is Still Good News 😵‍💫 

Step up to the plate, maniacs. It’s the bottom of the ninth and the labor market is throwing curveballs.

In April, unemployment inched up to 3.9% from the expected 3.8%, and job gains totaled 175,000—well below the consensus estimate of 240,000. Yikes!

But before you dust off the doomsday bunker, here’s the twist: The market rallied on this “bad news.”

Wait, what?

As it turns out, both the stock market and the Fed want you poor and unemployed (kidding, kind of).

Rising unemployment signals that the labor market is shifting from an employee’s market to an employer’s market. This should slow wage growth and cool inflation, giving the Fed room to finally cut rates. In fact, hopes of a September rate cut have already reemerged.

In short, bad job data could mean good news for your stock portfolio.

But keep in mind that the market is as wishy-washy as it comes these days.

1. We entered the year with six predicted rate cuts.

2. Hot inflation prints dashed our collective hopes down to zero.

3. Now, we’re expected to see a more reasonable one to three.

Brace yourself for more overreactions as the Fed tries to stick this soft landing.

2. Buffett Prepares To Pass The Torch 🥲

Berkshire Hathaway’s annual meeting, a.k.a. Woodstock for Capitalists, is a spectacle in Omaha. Tens of thousands of shareholders flock to the city every year to hear Warren Buffett’s thoughts on markets and the business environment.

But this year was different.

Other than during lockdown, it was the first meeting without Buffett's longtime business partner, Charlie Munger, who passed away last November. Munger was known for his investing wisdom and humor.

However, Munger’s absence wasn't the only change in the air. Perhaps reminded of his own mortality, Buffett seemed to begin passing the torch.

He even joked, “I not only hope you come next year, I hope I come next year.”

Buffett confirmed that Greg Abel, Vice Chairman of Non-Insurance Operations, would be the next CEO of Berkshire Hathaway ($BRK.B). This wasn’t a shock to anyone paying attention (thanks to a prior slip by Munger), but the announcement still marked a pivotal moment.

The real news is that Abel will also take over all capital allocation decisions, including stock picking, when Buffett steps down. The Oracle of Omaha expressed confidence in his successor, stating, “We’ve really got the problem solved for the next 20 years unless something untoward happens.”

Despite the initial focus on succession, Berkshire's business results soon took center stage.

Q1 operating earnings surged 39% year-over-year. Buffett emphasized these are the best way to gauge Berkshire's performance, as they exclude market fluctuations.

Berkshire’s cash hoard also reached a staggering $189 billion in Q1, and Buffett predicted it will hit $200 billion by the end of Q2. He noted, “We only swing at pitches we like”—a Buffettism as old as time and a reminder every investor could use.

Buffett also provided a straightforward blueprint for Berkshire’s future: increase operating earnings, decrease shares outstanding, and keep an eye out for the next big opportunity.

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3. Buffett and Druckenmiller Trim Tech Holdings 👀

Warren Buffett and Stanley Druckenmiller have two things in common: Both are legends in the investing world, and both recently trimmed their holdings in tech giants Apple and Nvidia.

Buffett’s Berkshire Hathaway reduced its stake in Apple ($AAPL) by 13% in the first quarter—the second consecutive quarter it's sold. Still, Berkshire remains Apple's largest non-index shareholder.

Buffett claims the cut was due to tax reasons rather than a loss of faith in the company.

But with Apple making up ~40% of Berkshire’s portfolio, you can’t expect him to say much else. Any outward lack of confidence could rattle investors, affecting Apple’s share price and his holdings.

Plus, Berkshire already had $168 billion in cash at the end of the previous quarter. Respectfully, what kind of tax bill is Buffett expecting? That’s 7x more cash than Berkshire would need to cover the taxes of selling its entire Apple position!

If Buffett is, in fact, just giving a neutral reason for selling Apple here, there are two potential conclusions:

1. Apple is losing its luster (on a relative basis)

2. Buffett wants an even bigger cash pile ahead of the next market pullback

Meanwhile, billionaire investor Stanley Druckenmiller slashed his stake in Nvidia ($NVDA) after the stock’s meteoric rise from $150 to nearly $900.

Druckenmiller believes there may be short-term overhype around AI. However, he remains bullish long-term, comparing the AI boom to the internet revolution of the 1990s.

He added, “A lot of what we recognized has become recognized by the marketplace now.” In his view, Nvidia’s days of wild outperformance are behind it because investors have already priced in its incredible growth trajectory.

What do you think? 👇

4. Rate Cutting Abroad Continues 🌍

While the U.S. Fed stays the course, central banks across Europe are beginning to unwind their hiking cycles. Here’s the latest:

1. Switzerland Leads the Charge
In a surprise move, Switzerland became the first major economy to cut rates in March. The Swiss National Bank (SNB) lowered its main policy rate by 0.25 percentage points to 1.5%.

2. Sweden Joins the Club
Sweden’s central bank, the Riksbank, followed suit earlier this week by reducing its key interest rate to 3.75% from 4%. Governor Erik Thedeen indicated that two more cuts are likely this year if inflation remains mild.

3. Bank of England on the Brink
Yesterday, the Bank of England held its key rate at a 16-year high. However, it signaled plans to join its European peers in cutting rates over the coming months, possibly as early as June.

4. ECB Eyes June Cut
The European Central Bank is also expected to cut rates next month. President Christine Lagarde clarified that the ECB is “data dependent… not Fed dependent,” highlighting Europe's divergence from the U.S.

5. Fed Plays It Cool
In contrast, the Fed isn't expected to cut rates until September at the earliest. Chair Jerome Powell emphasizes that the U.S. economy is experiencing stronger growth than Europe and inflation remains stubbornly high.

What Does Rate Divergence Mean for Investors?

Remember when we all ditched our measly 0.01% Chase savings accounts in favor of 5% high-yield savings accounts? Investors all around the world are chasing yield in the exact same way.

So when U.S. interest rates are high, investors plow more money into U.S. investments. To do so, they must exchange other currencies for dollars.

These exchanges effectively boost demand and therefore strengthen the dollar.

Here’s what a stronger dollar does:

• Imports: Imports get cheaper since your dollar buys more foreign currency.

• Exports: U.S. exports become less competitive internationally as our goods require more foreign currency.

• Foreign Revenue: Businesses with significant foreign revenue get dinged when converting local currencies back to dollars. Morgan Stanley says roughly “one-third of the profits of S&P 500 companies” are exposed to this risk.

If the divergence is short-lived, these impacts will be minimal. But if U.S. inflation stays hot and the Fed remains patient, these effects could begin to affect earnings reports and domestic policy. Stay tuned!

5. Fat Profits From Fat Loss Pills 💸

Both Novo Nordisk and Eli Lilly reported earnings recently, and one thing is clear—skinny sells.

Novo Nordisk ($BRK.B) is Europe’s MVP in pharma. Actually, it might just be Europe’s MVP. (Sorry, Nikola Jokic.)

Thanks to the incredible success of diabetes drug Ozempic and weight loss marvel Wegovy, the company is now more valuable than the entire Danish economy.

Combined, these meds delivered a 28% profit jump for Novo Nordisk, helping to justify the stock’s ~60% rise over the past year.

On the other side of the Atlantic, Eli Lilly ($LLY) saw profits soar by 67% year-over-year. America’s pharma titan has a similar one-two punch, with diabetes drug Mounjaro and weight-loss wunderkind Zepbound.

With a 24/7 production hustle and $2 billion added to their annual sales forecast, Eli Lilly is racing to meet the insatiable demand.

After all, over 42% of U.S. adults are considered obese (BMI 30+), creating a potential $100 billion/year market for these drugs. At this point, the only issue for consumers is affordability.

Unfortunately, high prices are to be expected until supply can catch up with demand. For now, weight loss goes to the highest bidder.

However, Novo Nordisk has invested ~$17 billion in rolling out new production facilities, and Eli Lilly has seven new facilities either “ramping up or under construction.”

In the coming years, greater supply, Medicare negotiations, patent challenges, and the introduction of alternatives should moderate prices.

But until then, sticker shock is the name of the game. So unlike their customers, these two pharmaceutical companies may keep getting bigger.

That’s all for today! For more insights, follow me on Instagram, Twitter, and at TheMoneyManiac.com.

Also, I’d love to hear your feedback. So please reply with comments – I read everything.

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.