Find out the possible reasons to why Berkshire Hathaway is selling bank stocks during the ongoing Covid-19 crisis.
The Billionaire investor and the Oracle of Omaha sold off 84% of his stake in Goldman Sachs and cut its stake in JP Morgan Chase & Co., by 3% in the first quarter.
These moves by Warren Buffett is very unusual and some might think it is counter to what he often preaches:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”― Warren Buffett.
So What is Exactly Happening?
As the coronavirus situation pulls on and with many states remain in lockdown, there has been substantial impact to the economy. Total nonfarm payroll employment fell by 20.5 million in April, and the unemployment rate rose to 14.7 percent, the U.S. Bureau of Labor Statistics reported for the month of April.
As the U.S. economy goes into a prolonged economic recession, the biggest concern will be the corporate debt bubble. US corporations are sitting on nearly $10 trillion in debt. That’s equivalent to roughly 47% of the overall economy, a record, according to data cited by The Washington Post. Since the financial crisis in 2008, corporations have splurged on debt amid historically cheap borrowing costs due to low interest rates.
This poses significant downside risk for banks. As cash flow and revenue continue to suffer, companies will find it increasingly difficult to service their debts, ultimately, this will lead to default rates to rise. Moreover, as unemployment rate rises and pay-checks are slashed, residents will also find it increasingly difficult to service their debts. In turn, mortgage default rate will rise too. When the corporate debt bubble burst and the mortgage default rate rises, the biggest losers are going to be the banks! Banks play an important role as financial intermediaries which are the largest commercial lenders in the economy.
Managers and Chairmen are Doing the Work?
Buffett has been acting very strangely, with many actions that are unlike his style. Manager Todd Combs, vice chairmen Greg Abel and Ajit Jain are the top runners to succeed Warren who is 89 years old this year. There is a huge likelihood that many of the recent trades are performed by the managers and Chairmen as Warren could be preparing a Berkshire Hathaway without him.
Buffet Remains Optimistic
Buffett recently said that he is optimistic that the U.S. economy can bounce back and overcome coronavirus. “I remain convinced… nothing can basically stop America,” he told Berkshire shareholders at the annual meeting. “In the end, the answer is: Never bet against America.”
Berkshire Hathaway’s Cash Pile
Berkshire Hathaway’s cash pile now stands at $137 billion. Buffett claims that he has been sitting on such a large cash pile as he has not been found any business that interest him. However, I believe there is another factor to it which is that the market has not dipped to its lowest and there are still much uncertainties with regards to the coronavirus situtation.
Other Sell Offs by Berkshire Hathaway
- ) Sold all airline stocks which include the four largest U.S. airlines: United, American, Southwest and Delta Airlines.
- ) Fully exiting positions in insurance giant Travelers and energy company Phillips 66.
The other sell offs also reflect very grim long-term view of the airline and energy industries. The coronavirus has been and will continue to transform our society and it will never be the same prior to the pandemic again.
I believe this shows strong signs that the coronavirus will likely stay for the long haul. We should be prepared for it and factor this scenario into our investment decisions.
