Jan 312018
 

I am quoted in the Smith Brain Trust:

 

SMITH BRAIN TRUST – For those who listen closely to what Warren Buffett says, the announcement that Berkshire Hathaway was hooking up with Amazon.com and JPMorgan Chase to create an independent healthcare company didn’t come as a big surprise. Buffett, the billionaire investor and Berkshire Hathaway CEO, has been lamenting the state of healthcare in the country and its corrosive effect on the economy for much of the past year.

“He has been hinting that there is a problem here that needs to be solved, and now this morning he is saying that he is going to begin to try to solve it with Amazon.com CEO Jeff Bezos and JPMorgan Chase CEO Jamie Dimon,” says David Kass, clinical professor of finance at the University of Maryland Robert H. Smith School of Business. Kass is a former health economist for the federal government and has followed Buffett’s investments and philosophy for more than 35 years.

Details remain limited about the new initiative, which brings together the country’s best-known billionaire investor, its biggest online retailer and its largest bank by assets.

The three companies said Tuesday the entity, which would be “free from profit-making incentives and constraints” would use technology to provide simplified, quality health care at a reasonable price. The news sent shares of established health insurers sharply lower on Wall Street.

The notion of divorcing health care from profit incentives answers a criticism that’s been rising, with unchecked cost increases in the healthcare sector wildly outstripping rates of inflation in recent years. Buffett has referred to the rising costs of healthcare as “a hungry tapeworm” attacking the U.S. economy. “Our group does not come to this problem with answers,” Buffett said Tuesday. “But we also do not accept it as inevitable.”

In the United States, health-care spending increased 4.3 percent in 2016 to $3.3 trillion, accounting for an 18 percent share of the country’s gross domestic product, according to the U.S. Centers for Medicare and Medicaid Services.

“I think there are opportunities to reduce the prices and price increases of pharmaceuticals in this country,” says Kass. “It is quite glaring how much lower prices are for specific pharmaceuticals in other countries. There is enormous potential for cost savings.”

Buffett last year warned that health insurance – not the U.S. tax code – was “crippling” American business around the world. Speaking at Berkshire Hathaway’s annual shareholder meeting in Omaha, Neb., last May, Buffett urged business leaders to shift their focus away from their tax bills and take a closer look at skyrocketing health care costs. He warned that increases in health care costs in recent years were crushing profits, touting the broad benefits of a single-payer or universal type of health coverage for all U.S. citizens, perhaps with an opt-out provision that would allow wealthy individuals to choose a more upscale plan.

In the same year, Amazon announced that it had obtained licenses to operate pharmacies in at least 12 states: Alabama, Arizona, Connecticut, Idaho, Louisiana, Michigan, Nevada, New Hampshire, New Jersey, North Dakota, Oregon and Tennessee. The move, announced in October, followed months of speculation that Amazon was looking to disrupt the country’s dysfunctional healthcare sector.

“Warren Buffett has referred to Jeff Bezos as the best manager in the world,” Kass says. “It was probably just a matter of time before they partnered on something. And Bezos has been, through Amazon.com, quite innovative.”

Kass adds that Buffett has had a close professional relationship with both Bezos and Dimon. “These are three prominent corporations and three prominent corporate leaders. They talk to each other periodically and they are each pretty innovative,” Kass says.

The partnership could be transformative for the wider corporate world, Kass notes. “It will certainly be in the interest of other corporations to observe what is happening here,” he says

 Posted by at 12:03 pm
Jan 302018
 

From the Wall Street Journal:

 

Amazon.com Inc AMZN 1.11% Berkshire Hathaway BRK.A -0.74% and JPMorganJPM -0.10% Chase & Co. are forming a company to figure out how to reduce health-care costs for their hundreds of thousands of U.S. employees, the three companies said Tuesday.

“The ballooning costs of health care act as a hungry tapeworm on the American economy,” Berkshire Chief Executive Warren Buffett said in prepared remarks. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”

The new company will focus on technological solutions that can provide simplified and transparent health care for the three companies U.S. employees at a lower cost.

Todd Combs, an investment officer at Berkshire Hathaway, Marvelle Sullivan Berchtold, a managing director of JPMorgan and Beth Galetti, a senior vice president at Amazon, are overseeing the company’s formation.

A longer-term management team, headquarters location and operational details of the new company will be announced later, the companies said.

 Posted by at 7:49 am
Jan 182018
 

I am quoted in the Washington Post: “Warren Buffett’s Berkshire Hathaway had an amazing 2017.  2018 isn’t looking too bad, either.”

“I would not be surprised to see both Jain and Abel joining vice chairman Charlie Munger and chairman Warren Buffett on the stage at the upcoming May 5 meeting, not only answering shareholder questions, but also eating See’s Candies’ peanut brittle and drinking Cokes,” said David Kass, a finance professor at the University of Maryland.

 

 Posted by at 10:40 pm
Jan 102018
 

Warren Buffett (87) and Charlie Munger (94) were interviewed for one hour at 8:00 a.m. today on CNBC.  The highlights were:

(1) Greg Abel (55) and Ajit Jain (66) have been added to Berkshire Hathaway’s board of directors.   Greg Abel will be Vice Chairman – Non-Insurance Business Operations, and Ajit Jain will be Vice Chairman – Insurance Operations.  Buffett said this will give each of them the experience of supervising businesses.  There will be one CEO after Buffett is no longer there, presumably Abel or Jain in the near future. But 4 years from now it could be someone else.

(2)  Stocks are not richly valued at current interest rates.  Interest rates act like gravity.  Berkshire is a net buyer of equities.  Equities are the place to be.  Bonds paying 2% are selling for 50 times earnings with no growth.  Corporations are earning 15% on assets.

(3) Tax law increases corporate earning power by about 20%.  Buffett says the tax law is very favorable for Berkshire shareholders. Since Berkshire’s tax rate drops from 35% to 21%, it will now keep 79% of pre-tax profits vs. 65% before. This 14% increase in the share of its pre-tax profits that it retains, represents an increase of about 20% in its after-tax profits.  Furthermore, Berkshire’s deferred tax liabilities are similarly reduced on its unrealized capital gains of $100 billion.  For example, if Berkshire realized capital gains in 2017, it would have paid a 35% tax.  Now Berkshire would pay only 21%

(4) The 21% corporate tax rate was not baked into stock prices.

(5) Both Buffett and Munger would have voted for the tax bill.

(6) Bitcoin will have a bad ending.  Buffett would buy 5-year puts on cryptocurrencies.

(7) Buffett likes Apple and has been buying its shares (at least through September 30 — last SEC 13F report).  The market for iPhones is not yet saturated.  (Berkshire is one of the largest shareholders of Apple.)

(8) GE is a “big, strong company” and Berkshire would buy it at the right price.

(9) Berkshire owns about $100 billion in U.S. Treasury Bills, representing over 5% of the total U.S. Treasury Bills outstanding.

(10) Charlie Munger is happy with Abel and Jain.  Share prices are not crazy with bonds at 3%. There is a bubble in bitcoin and in venture capital (too much money).

(Note:  This blog post has been published by Value Walk.)

 

 Posted by at 10:13 am
Jan 082018
 

I am quoted in a Kiplinger article: “Warren Buffett: Why Index Funds Trump Hedge Funds”

Buffett has long been a critic of excessive fees, notes David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who studies Buffett and is a Berkshire shareholder.

“Buffett said at a recent Berkshire annual meeting, when he asked a hedge fund manager why he charges  ‘2 and 20,’ the response was ‘because I can’t get “3 and 30,” Kass says.

“Warren Buffett has recommended that when he is no longer here, his wife should invest 90% of her money in a low-cost S&P 500 index fund such as that offered by Vanguard. The other 10% would be invested in Treasuries to provide liquidity,” Kass says.

“In order for hedge funds to justify their ‘2 and 20’ fee structures, their rates of return after fees must exceed what any investor can earn from a low-cost S&P 500 index fund,” Kass says. “Their fee structures makes this extremely difficult to achieve over time.”
 Posted by at 4:43 pm
Jan 032018
 

I am quoted in Smith Brain Trust (Robert H. Smith School of Business, University of Maryland) on “Top Five Stocks to Watch in 2018”.

 

Bet on Berkshire, Apple, Wells Fargo, BofA and Kraft Heinz

SMITH BRAIN TRUST – 2017 was a pretty happy year for stock investors, and David Kass says he expects 2018 to be rosy as well.

Kass, a professor of finance at the University of Maryland’s Robert H. Smith of Business, says he expects the S&P 500 and the overall stock market to climb another 10 to 15 percent this year. “And the major impetus to the increase,” he says, “is really the corporate income tax cut that will be going into effect, beginning in January, as well as the economies around the world continue to recover and as economic growth expands in the United States.”

“I expect interest rates in this country to rise only gradually,” he says, with two or three quarter-point increases over the course of the year. Investors, having long anticipated those interest rate increases, have already largely factored the impact of higher interest rates into their pricing of equities, he adds.

“Interest rates are near historically low levels and will remain relatively low, even with these increases,” Kass says. “The overall background will remain very favorable for stocks, as it was for 2017.”

Kass has closely followed the financial markets for over 50 years, and Warren Buffett’s investments and philosophy for more than 35 years. Kass says the stocks he likes in 2018 are the same ones he liked in 2017. “Like Warren Buffett, I have a long time horizon, and I’m focused on the long term when I consider investments,” he says.

Here are his top five stock picks for 2018:

Berkshire Hathaway. The Omaha-based conglomerate led by Buffett should be “a very major beneficiary” of the new 21 percent corporate income tax rate, approved by Congress last year. Berkshire had been paying an effective tax rate of 27.5 percent. “Plus they have common stock investments with large unrealized capital gains that they will be able to sell in 2018 or later at a lower corporate income tax rate, which reduces their deferred tax liabilities” Kass adds. The tax cut alone might add another 10 percent to the price of Berkshire Hathaway in 2018.”

Apple. Kass says he continues to recommend Apple, despite periodic hand-wringing in the market about the company’s outlook. “Apple has established a subscription model,” Kass says. “People who buy their iPhones tend to trade up to the latest, most up-to-date models, roughly every 2.5 years. And they also sign up for the latest apps.” The Cupertino, Calif.-based company functions as both a consumer and a technology company, Kass says. “It’s a perfect blend of both.” Apple’s stock price is reasonably valued at current prices, he says, around $170 this week. Berkshire owned about $21 billion of Apple’s shares as of Sept. 30.

Wells Fargo and Bank of America. Rising interest rates and lower corporate tax rates are good news for the financial sector. “With rising interest rates, banks in general should see their profits increase in 2018, as well as subsequent to 2018,” Kass says. He has his eye on the San Francisco-based Wells Fargo and Charlotte, NC-based Bank of America — both among Berkshire’s top five holdings. Berkshire was holding about $25 billion in shares of Wells Fargo and $17 billion of Bank of America as of Sept. 30. Wells Fargo, in particular, appears poised for a good year. It had been subject to a higher tax rate than some of its peers in the financial sector as well as its peers in the broader economy, so the new lower corporate tax rate is very welcome news for that financial institution. “I would recommend both of those banks at current (stock) prices,” Kass says.

Kraft Heinz. The food giant that makes Heinz ketchup and Kraft cheeses is 25 percent owned by Berkshire Hathaway and 25 percent owned by Brazilian private equity group 3G Capital. “Kraft Heinz has made a major food acquisition every two years for the past four years,” Kass says. (H. J. Heinz was acquired in 2013 and Kraft was acquired in 2015.)  “Their model is to buy an undermanaged food company and run it more efficiently, reducing costs and trying to grow the company, and substantially increasing profits in the process. I expect Kraft Heinz to make a large food acquisition in 2018.” The acquisition, he says, is likely to boost the share price of the Chicago-based Kraft Heinz.

(Note:  This blog post has been published by Seeking Alpha and Value Walk.)

 Posted by at 11:27 am