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Supply chain problems crimp profit at Buffett’s Berkshire Hathaway; cash sets record

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November 6, 2021

By Jonathan Stempel

(Reuters) -Warren Buffett’s Berkshire Hathaway Inc said on Saturday that disruptions to the global supply chain kept a lid on its ability to generate profit, while rising equity prices caused it to sell some stocks and boost its cash hoard to a record.

Operating profit fell short of analyst forecasts, hurt by the disruptions as well as costs associated with Hurricane Ida and flooding in Europe, causing underwriting losses at the Geico car insurer and other insurance businesses to more than triple.

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Berkshire also said it repurchased $7.6 billion of its own stock in the third quarter and $20.2 billion this year, reflecting its need to deploy cash as stock markets set new highs and purchases of whole companies appear too expensive.

The repurchases, which appeared to continue in October, suggest Buffett sees greater value in his Omaha, Nebraska-based conglomerate, whose businesses include the BNSF railroad and namesake energy unit, than in others.

Indeed, Berkshire ended September with $149.2 billion of cash and equivalents, and sold about $2 billion more stock than it bought in the quarter.

Buybacks are “a great outlet to address shareholder pressure to add value,” said Tom Russo, a partner at Gardner Russo & Quinn in Lancaster, Pennsylvania, which has owned Berkshire stock since 1982.

“The supply chain creates choke points that inevitably will affect loads at Berkshire’s railroad, and is creating shortages in its housing businesses,” he added.

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Many companies have said the resurgence in COVID-19 cases fueled by the Delta variant stretched global supply chains, causing shortages in goods and crimping consumer spending.

U.S. gross domestic product increased https://www.reuters.com/business/us-economy-slows-sharply-third-quarter-weekly-jobless-claims-new-19-month-low-2021-10-28 at a 2% annualized rate from July to September, according to the government’s advance estimate, down from 6.7% in the second quarter.

Berkshire said supply chain disruptions have boosted prices for materials and freight, forcing businesses such as Clayton Homes mobile homes and Acme bricks to raise prices, and caused a shortage of truck drivers at McLane grocery distribution.

It also said disruptions have boosted costs at its consumer products businesses, though profits are rising at its Forest River RV, Brooks running shoes and Duracell battery units.

PROFIT FALLS SHORT

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Third-quarter operating profit rose 18% to $6.47 billion, or about $4,331 per Class A share, from $5.48 billion a year earlier, but fell short of the $4,493 per share forecast by analysts according to Refinitiv I/B/E/S.

Net income declined 66% to $10.3 billion, or $6,882 per Class A share, from $30.1 billion, reflecting lower unrealized gains on Berkshire’s common stock holdings including Apple Inc and Bank of America Corp.

Buffett, the 91-year-old billionaire, believes the huge quarterly swings in net results are usually meaningless, and result from accounting rules he doesn’t control.

The share repurchases boosted total buybacks to around $45 billion since the end of 2019. Berkshire’s share count declined further in October, suggesting it repurchased at least another $1.7 billion of its own stock.

Buffett’s inactivity in purchasing stocks and whole companies has disappointed some investors and analysts.

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It stems in part from the role of special purpose acquisition companies (SPACs), which take private companies public, in driving up prices of acquisition targets.

“It’s a killer,” Buffett said at Berkshire’s annual meeting on May 1.

Despite the supply chain pressures, quarterly profit at BNSF rose 14% to $1.54 billion, as higher shipping volume of consumer goods, industrial goods and coal offset lower grain exports.

Geico, meanwhile, posted a $289 million pretax underwriting loss, hurt by Ida and an increase in vehicle crashes.

(Reporting by Jonathan Stempel in New York; Editing by Mike Harrison, David Holmes and Grant McCool)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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