Knowledge comes, but wisdom lingers. It may not be difficult to store up in the mind a vast quantity of facts within a comparatively short time, but the ability to form judgments requires the severe discipline of hard work and the tempering heat of experience and maturity.
One of the great joys of being able to participate on this big, beautiful planet is waking up each day to a different experience, completely removed from the previous twenty four hours. In a similar way, many find financial matters fascinating because of the ever changing circumstances in the various asset classes and markets all over the globe. Strikingly, the first three months of this year appear to be the twin of the first quarter of last year. For this reason, those who are involved with the investment world can be forgiven if they believe, as Yogi Berra so eloquently stated, 'It's Dejavu All Over Again.'
How is this the case? Last year, the first quarter was unique because of poor weather all over the country, especially in the East. The same thing happened this year as well. Who knew it got cold during Winter? Last year, investment and economic analysts were confident interest rate policy would have to tighten because of a stronger economy. Ditto for this year, although it appears that 'Lower for longer' is the appropriate way to wager on the Fed's future actions. With respect to corporate earnings, last year proved to a bit of a disappointment during the first quarter, and low and behold, the same thing may be taking place this year, with the villain this time being a stronger dollar. In trying to apply Mr. Coolidge's quote to our current circumstances, it may very well be appearances are deceiving.
In the financial markets this week, the biggest news came in the merger and acquisition arena where 3G and Warren Buffett teamed up to acquire Kraft in very much the same way the two entities purchased Heinz. The rationale behind this transaction is simple in that one year after 3G purchased Heinz, they have dramatically cut costs and raised operating margins by nearly 5%. Kraft has been a notoriously bloated entity and if 3G is able to employ their long heralded financial discipline, the change in operating margins at Kraft will be dramatic as well. Companies don't get as big and as successful as 3G and Berkshire Hathaway have been because they are not fine operators who watch their costs closely. Skeptics have a good point about Kraft offering products which the public may be turning away from, namely those with heavily processed and non-organic based ingredients. Still, the company has a dominant position in the supermarket aisle and that certainly will not change any time soon.
Elsewhere in the investment world, big news comes from the technology area as it is being reported Intel will by Altera for nearly $14 billion in a deal to further consolidate the semiconductor chip space. Intel continues to try and diversify away from it's dependence on PC's, and this move is consistent with the strategy. In other areas of technology, SanDisk warned of lower revenues for the rest of 2015 because of issues in their fastest growing division, Solid State Drives (SSD). The announcement only highlights the well known fact that storage has historically been extremely competitive, and remains so.
Oil prices bumped up a bit because of the political instability in all areas of the Middle East, but particularly in Yemen. The battles all over the region between the Shiites, sponsored by Iran, and Sunni's, who are led by Saudi Arabia, don't appear to be going away any time soon. One could make a strong argument they have never been more heated, dangerous, or occurring in more places than ever before. In Yemen, the logistics of the Suez Canal and the positioning of those loyal to Iran, the Houthi's, could increasingly make the transport of Brent much more difficult from Europe to Africa. On a global basis, oil remains under pressure because of the production levels in the United States, but rig counts have been chopped dramatically. The next three months, maybe six will be difficult for oil prices, but I would not bet on 2015 ending up the same as 2014 in this important area.
Shhh, don't tell our ostrichish leader, the big O (you could easily replace the O with zero). He still believes the U.S. should make a deal with Iran regarding their nuclear capabilities. Of course, consistent with the wisdom from Mr. Coolidge, the key ingredients O lacks would be experience and maturity, upon which judgment is based. (By the way, Business Insider has a nice article today about how lower oil prices benefit both India and China, which is where all the projected growth of oil demand will take place.)
As a follow up to last week, Starbucks decided their decision regarding a race campaign was erroneous. Accordingly, they pulled the plug on the effort, which was much derided. Part of being successful is knowing when you are in a hole, you stop digging. Starbucks will probably continue exploring ways to improve and develop a dialogue on race relations, but I would bet they will take their time and maybe explore those initiatives on a more limited and trial basis.
Next week will be a shortened week in the markets as Good Friday is being observed. The March employment report will be a big number investors will watch. In a few weeks, earnings reports will start rolling in again. I hope you have a great weekend and if you have any questions regarding the column, market, or about Y H & C Investments, please email me at
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