Newsletter Week 25
WEEK 25 | JUNE
Financial Markets & Economies: High demand
Good to know: Bubbles
Your portfolio highlights: Berkshire Hathaway, Lunar Value Fund, L E Lundbergföretagen
In other news: Brookfield competing to acquire Modulaire Group, China’s central bank urges Alipay and banks to crack down on crypto speculation
Financial Markets & Economies
Markets started to rebound after last week’s sell-off. Oil continued its upward path as the American Petroleum Institute announced a decline in crude oil inventories this week and Baker Hughes (an energy technology company) announced that active U.S. oil rigs has been growing exponentially. Oil rigs are structures with facilities for well drilling in order to explore, extract, store, and process petroleum and natural gas that lies in rock formations beneath the seabed. An increase in oil rig counts is an indication of bright outlook in terms of demand for the commodity. Speaking of commodities, the demand for commodities is getting so high that even commodity theft is peaking in the United States and the United Kingdom. Palladium, lumber, and copper are among the commodities being stolen from construction sites, manufacturing facilities, and parked cars (car catalytic converters contain palladium). We are not here to report on crimes, but we want you to know how crazy the commodity demand is getting versus the limited supply. Increasing prices (inflation) are appearing to be more persistent than previously expected said Fed Chairman, Jerome Powell. Still, it is “very, very unlikely” that the U.S. will experience an inflation period such as in the 1970s stated Powell.
Good to Know
You might have heard of a bubble, financial/ asset bubble or an economic bubble before. Bubbles, in an economic context, refers to a situation where the price of something (a stock, financial asset, sector, market, or asset class) exceeds its fundamental value by a large margin. Bubbles fit into four basic categories: stock market bubbles, market bubbles, credit bubbles, and commodity bubbles. When a bubble occurs it is speculative demand, rather than intrinsic worth, that is the cause of the inflated prices. The bubble eventually pops, and massive selloffs cause prices to decline rapidly. The rapid growth seen in bubbles is thus shortly lived. It abruptly reverses course dragging asset prices down with it. Price sometimes fall even lower than their original levels. Interestingly, a bubble is initially created by sound fundamentals. Demand is later spurred by exuberant, irrational, and speculative behavior. Buying for the sake of buying with the hope that prices will continue to rise. How to avoid bubbles you may ask. First of all, bubbles are not easily spotted but they are the results of our behavioral financial biases. These behaviors include:
Herd mentality: doing something because everyone else is doing it
Short-term thinking: merely looking at immediate returns
Cognitive dissonance: only accepting information that confirms an already-held belief and ignoring anything that does not
As value investors we are purely focused on the underlying values and not the hype around an asset price. The principles of value investing help us avoid these psychological “traps” and allocate capital where there is more fundamentals and less speculation.
Your Portfolio Highlights
Berkshire Hathaway (BRK.B) and its chairman Warren Buffett hits the news once again because of multiple developments. According to the company Edward Jones & Co, Berkshire Hathaway is still buying back more of its own stocks with a value estimation of $5.15 billion being bought between April 22 and June 22 and
$6.46 billion in the second quarter of the year. This can be due to deal frustrations or pure confidence in one’s own stock said Cathy Seifert, a research analyst at CFRA. There are two Berkshire backed companies that started the Initial Public Offering (IPO) process. Those are Paytm (India) and Nubank (Brazil). Paytm is seeking shareholders’ approval to sell about $1.6 billion new stock in the IPO with a potential of 1% over-allotment. In total the company is planning to offer up to $3 billion shares in the IPO. The details of the Nubank IPO are not known yet since it is not likely to take place prior to the end of next year. There is certainly no rush said the CEO, but the Nubank IPO would be one of the biggest stock market debuts of a South American company. On a personal level, Warren Buffett donated $4.1 billion worth of Berkshire Hathaway stocks to the Bill & Melinda Gates Foundation as he stepped down as trustee of the same. The donations left him with a 15.8% stake in Berkshire Hathaway as per the regulatory filings show. Buffett pledged in 2006 to giveaway all of his Berkshire Hathaway shares as charity of which he has reached the halfway mark after the $4.1 billion donation.
The euro denominated Lunar Value Fund (LVF) invests in about twenty European publicly traded companies and puts the emphasis on individual security selection based on thorough fundamental analysis rather than general equity market movements. The Fund concentrates its research and capital on undervalued, mid-cap companies chosen from a carefully defined universe of quality industrial and consumer products and services companies. The Fund returned +13.74% so far this year with L E Lundbergföretagen being one of the top performing. L E Lundbergföretagen returned +20.94% so far this year and +96.17% since purchase.
L E Lundbergföretagen AB (LUND-B) is an investment company that manages and develops a number of companies based on long-term, active ownership. Clear leadership, responsibility and soundness, sustainable business acumen, along with a solid financial positioning, are important values that characterize the Lundberg approach. The objective is to generate a return for shareholders that comfortable meets the return requirements of the market by growing dividends and net asset value. L E Lundbergföretagen AB was founded in Norrköping, Sweden, in 1944 by Lars Erik Lundberg. Lundbergs originally focused on building residential housing, but over the years the company has evolved from a construction company into an investment company with interests in a range of industries. The company always had a long-term approach to ownership. Lundbergs has been listed on Nasdaq Stockholm since 1983. L E Lundbergföretagen AB invests in real estate and publicly traded companies. The portfolio of assets includes the wholly owned business Lundbergs Fastigheter, the subsidiaries Hufvudstaden and Holmen and the associated companies Industrivärden, Indutrade and Husqvarna. Lundbergs also has major shareholdings in Handelsbanken, Sandvik and Skanska. Direct and indirect real estate exposure accounts for approximately 25% of their total assets. The remaining 75% relates to publicly traded companies outside the real estate sector. There is a favorable balance between the assets which are characterized by high quality and low risk. The company is led by Frederik Lundberg. *Please visit the L E Lundbergföretagen AB website for more information or click on one of the images below for their latest annual
L E Lundbergföretagen AB - Year-to-date stock price movement
In Other News
Brookfield Asset Management and Onex Corp. are competing to acquire Modulaire Group, the European designer of modular work spaces
China’s central bank urges Alipay and banks to crack down on crypto speculation