Making sense of the markets this week: August 24

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Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Buffett finds profits (but perhaps not religion) in gold

Warren Buffett bought gold, shocking his followers and most investors. The move is significant, as Mr. Buffett, recognized as the world’s greatest investor, he has long opined that gold is a terrible investment. … “[Gold investments are] assets that will never produce anything. Because gold doesn’t multiply and there’s very little you can make with it.” –Warren Buffett, in a 2012 shareholder letter Yet, it’s been confirmed that Warren Buffett’s Berkshire Hathaway purchased US$564 million worth of shares in Barrick Gold, a Canadian gold miner. Following the purchase, Barrick’s stock price rose 12% on Monday, August 17, and iShares Global Gold Index ETF was up over 6%. Barrick Gold CEO Mark Bristow called the inaugural investment from Berkshire Hathaway a “significant step” for his gold mining company, and for the industry. However, no one knows for sure if it was Buffett himself grabbing those shares. It might have been one of his Berkshire lieutenants, such as Todd Combs, who have free rein for more modest purchases—but it’s likely the buy was run by the boss first. Maybe, as I have speculated out loud, even pre-Berkshire entry, gold simply is too good to pass up. It’s an asset that costs $1,100 per ounce to produce, and sells for nearly $2,000 per ounce; what’s not not to like? Mr. Buffett often opens up to the press about his purchases and rationale, and I can’t wait to read the scoop on who, exactly, bought Barrick, and why. And for the record, I hold iShares XGD and gold ETFs with direct gold exposure. My wife holds Berkshire Hathaway shares (BRK.B).

“Boring” Walmart grows its e-commerce business by 97% during COVID

Earnings season is still underway, with many retail giants reporting second-quarter results—including Walmart. The retail behemoth is known as a “recession-proof” stock. Certainly, that phrase needs to be in quotation marks, as no stock is truly recession-proof. But when we hit troubling times, consumers will obviously look for lower priced items. As per the above link, that was the case in the financial crisis and recession of 2007–2009, when Walmart’s revenues and earnings saw a healthy boost:

2007 adjusted earnings-per-share of $3.16
2008 adjusted earnings-per-share of $3.42 (8.2% increase)
2009 adjusted earnings-per-share of $3.66 (7% increase)
2010 adjusted earnings-per-share of $4.07 (11% increase)

Now, Walmart and its investors (I’m one of them) are having their way in the pandemic period as well, with the company benefiting from the surge in online shopping. Walmart saw a 97% increase in online sales for the quarter, over 2019 sales, and same-store sales for Walmart’s traditional retail outlets increased 9.7%. Shoppers are making fewer trips to stores, but spending 27% more when they do visit. Here’s some more reading of tea leaves from Walmart, and this one may be troubling. Walmart noted a correlation between spending and stimulus cheques in the U.S.—and now those COVID-related government benefits are set to fall in the U.S. and Canada. Connecting the dots, perhaps the Walmarts of the world are about to see some shoppers and revenues disappear.

Canadian real estate says “what pandemic?”

Real estate is a big driver of the Canadian economy. In fact, real estate and its spin-off effects have powered the economic engine in Canada for a few years now. (And you thought it was oil and gas, ha.) According to Better Dwelling, in the third quarter of 2019 real estate was responsible for more than half of Canada’s GDP growth. In July 2020, Canadian housing markets set multiple records, despite the fact that we are in the middle of a financially challenging pandemic. And the growth occurred in every major Canadian real estate market. From the Canadian Real Estate Association (CREA):

National home sales rose 26% on a month-over-month (m-o-m) basis in July.
Actual (not seasonally adjusted) activity was up 30.5% year-over-year (y-o-y).
The number of newly listed properties climbed 7.6% from June to July.
The MLS Home Price Index (HPI) rose 2.3% month over month and was up 7.4% year over year.
The actual (not seasonally adjusted) national average sale price posted a 14.3% year over year gain.

There are many benefits to a booming real estate market, including the wealth effect. That is, when our net worth is increasing, we feel more confident and might spend more, which in turn keeps the economy going. A healthy real estate market also means more funds for retirees who might sell their properties to downsize. Higher home values mean more money is available by way of HELOCs and reverse mortgages. The dark side is how this trend shows the contrast between how high and low income earners have been affected by the COVID-19 pandemic. These record real estate purchases were made by affluent savers who were waiting on the sidelines, while the virus has hurt the financially vulnerable and lower income workers.

Moving to cash in the crash

It was a very small group, but some Vanguard investors bailed out during the recent COVID correction. They sold all of their stock and bonds and went to cash. Let’s talk about why, and how that went for them. From MarketWatch… “Now, the Vanguard crowd isn’t exactly that of Robinhood—between Feb. 19 and May 31, only 5% of self-directed defined-contribution plan participants traded at all. The proportion was somewhat higher among retail self-directed households, with 17% making some trades during that time period. For both sets of investors, less than 0.5% of clients moved into all-cash portfolio, Vanguard said.” Here’s the link to the Vanguard Study: Cash panickers: Coronavirus market volatility. What I found very surprising is that almost two-thirds of the panickers in the defined contribution plans were women. That goes against convention, as women are known to be better investors than men as there is less male-oriented “hunting and killing,” along with more patience. There is usually less of the fight-or-flight response when the market’s blue skies darken. And, as you might expect, the study showed that those who stayed the course, instead of moving into cash, have come out on the other side with greater returns.

The S&P 500 trades at all-time high

A record was touched in last Tuesday’s trading: The S&P 500 reached an all-time high. And there may be fresh records ahead, as many analysts call for much higher prices. Goldman Sachs has even called for the S&P 500 to reach 3,600 points by year end. On Thursday, August 20, the world’s most watched and replicated index stood at 3,386. Tech dominance continues to drive the U.S. stock markets. Got FAANG? Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

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About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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