It’s jobs week in America, which means we’ll get a crucial update on the health of the US economy.
However, the investing world will continue to spend some time unpacking Warren Buffett’s 2014 letter to Berkshire Hathaway shareholders, which was published on Saturday.
Among other things, Buffett revealed some old mistakes. Costly mistakes.
Here’s your Monday Scouting Report:
Warren Buffett reveals two massive mistakes, which cost him $US100 billion. In Warren Buffett’s new letter, the Oracle of Omaha revealed something very surprising: Berkshire as you see it today was the result of a big mistake. Buffett says he had the opportunity to sell his Berkshire shares to Berkshire’s own Seabury Stanton at a 50% profit after holding them for just two years. But after they had a deal, Stanton decided he’d cut his offering price by $US0.125 per share from $US11.50.
“I bristled at Stanton’s behaviour and didn’t tender,” Buffett said. “That was a monumentally stupid decision.” Instead, Buffett bought more of this failing business in this failing industry, which he eventually shut down after 20 years of misery.
That mistake beget another even bigger mistake. In 1967, Buffett bought Omaha-based insurer National Indemnity Company. Except instead of buying this company for Buffett Partnership Ltd., Buffett’s investing vehicle which held most of his personal wealth, he bought this company through recently acquired Berkshire Hathaway, which came with a ton of legacy shareholders.
From Buffett: “Despite these facts staring me in the face, I opted to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision that eventually diverted $US100 billion or so from BPL partners to a collection of strangers.”
- Personal Income And Spending (Mon): Economists estimate income climbed by 0.4% in January as personal spending fell by 0.1%. Core PCE is estimated to have climbed by 0.1% month-over-month or 1.3% year-over-year. From Credit Suisse: “Healthy income details from the January jobs report point to a solid 0.5% rise in personal income. Nominal consumer spending likely softened, with tepid gains in core retail sales and a downtick in unit autos.”
- Markit US Manufacturing PMI (Mon): Economists estimate this manufacturing index climbed to 54.3 in February from 53.9 in January. “Manufacturing companies indicated a robust and accelerated expansion of production volumes during February,” Markit’s Chris Williamson said.
- ISM Manufacturing (Mon): Economists estimate this manufacturing index slipped to 53.0 in February from 53.5 in January. From Credit Suisse: “Regional surveys have weakened broadly and the recent decline in the New Orders index suggests the US goods sector has entered a soft patch. However, a strong outlook for US consumption should prevent the current momentum cycle from deteriorating too sharply in the medium-term.”
- Construction Spending (Mon): Economists estimate construction spending increased by 0.3% in January. From Morgan Stanley’s Ted Wieseman: “The 2% pullback in housing starts, with the higher value single-family component down 7%, points to a flat month for homebuilding activity. Nonresidential should be stronger, however. There’s been a regular pattern recently in this report of a weak current month for private nonresidential spending but significant upward revisions to prior months, suggesting technical issues with the survey. So we’re building in a good rise in January nonres but wouldn’t be surprised if instead January is weak again but the initially reported 0.2% decline in December is revised higher.”
- Auto Sales (Tues): Analysts estimate that the pace of US auto sales improved to an annualized rate of 16.7 million units in February from 16.56 million in January. From Morgan Stanley’s Ted Wieseman: “Mid-month industry surveys have pointed to a slight pickup in sales in February after the dip in January to a 16.6 million unit annual rate following the best two combined months in December (16.8) and November (17.1) in nine years. Much colder weather in the second half of February was probably a drag.”
- ADP Employment Change (Wed): Economists estimate private payrolls increased by 218,000 in February.
- Markit US Services PMI (Wed): Economists estimate this services activity index climbed to 57.0 in February from 54.2 in January. “Stronger growth of service sector activity in February puts a June Fed rate rise firmly back on the table,” Markit’s Chris Williamson said. “While parts of the East coast have struggled in the face of adverse weather, other regions basked in unusually warm temperatures, boosting business above seasonal norms. Activity levels surged higher and inflows of new business boomed as a result.”
- ISM Non-Manufacturing Index (Wed): Economists estimate this services index slipped to 56.5 in February from 56.7 in January. From BNP Paribas: “We likely saw some disappointment from the oilfield services sector; while a consumption boost from lower gasoline prices may have provided some offset. Weather effects and other seasonal factors present some downside risk to our forecast, as the winter months are particularly difficult to strip out seasonal volatility.”
- Fed Beige Book (Wed): The Federal Reserve will publish its collection of economic anecdotes at 2:00 p.m. ET. From Credit Suisse: “Now that the drama of Fed Chair Yellen’s semiannual testimony is over, next week’s Beige Book probably is not a significant focus for the markets. We will be searching through the report for anecdotes regarding the prospects for wage increases and looking for any hints that consumers are spending their gasoline savings elsewhere.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims fell to 295,000 from 313,000 a week ago. “The four week moving average remains below 300k and is indicative of labour market conditions that continue to improve,” Nomura said.
- Factory Orders (Thurs): Economists estimate orders climbed by 0.2% in January. From Morgan Stanley: “Durable goods orders gained 2.8% on a sharp rise in aircraft and 0.6% rebound in core capital goods, but a plunge in petroleum product prices is likely to lead to a steep drop in the dollar value of nondurable goods orders and leave overall factory orders down in nominal terms.”
- The Jobs Report (Fri): Economists estimate US employers added 235,000 jobs in February, bringing the unemployment rate down to 5.6% from 5.7% a month ago. From Deutsche Bank: “…we project a 250k gain in nonfarm payrolls, which compares to a 12-month moving average of 257k. Recall that payrolls have tended to be revised higher. If weather was a factor, it would likely influence hours more than jobs. This is why we expect the nonfarm workweek to slip 0.1 to 34.5 hours. This should push earnings up 0.3% versus a 0.5% gain previously. Additionally, we expect the unemployment rate to fall two tenths to 5.5%, which is the upper bound of the Fed’s central tendency for the NAIRU (5.2% to 5.5%). This is the last employment report before the March 17-18 FOMC meeting, so Friday’s results could have significant bearing on how the Fed tweaks its forward guidance.”
- Trade Balance (Fri): Economists estimate the trade deficit narrowed to $US41.5 billion from in January from $US46.6 billion in December. From Barclays: “January port statistics show a plunge in monthly container traffic, with inbound traffic down more than 20% m/m and outbound traffic slowing by about half as much. The labour disputes affecting West Coast ports were resolved in mid-February; however, port activity slowed in the preceding months and briefly ground to halt in February. We expect the unloaded container traffic to be processed in the coming weeks, but monthly trade statistics may remain volatile through the end of the first quarter.”
- Consumer Credit (Fri): Economists estimate consumer credit balances increased by $US15.0 billion in January. From Nomura: “Non-revolving consumer credit growth accelerated last year (likely due to an increase in auto loans). However, revolving credit growth was slow, showing some above-trend gains in only a few months. More solid growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
Some investing wisdom from Warren Buffett’s new letter: “Periodically, financial markets will become divorced from reality — you can count on that. …never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that maths is — zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.”
For more insight about the middle market, visit mid-marketpulse.com.
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