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Warren Buffett’s Mistake Of Selling Of Bank Stocks

7, 2021

5 min read

This story originally appeared on ValueWalk

Whitney Tilson’s email to investors discussing Warren Buffett’s $10 Billion mistake and the importance of thinking independently; robotics; the first mobile phone call.

Q1 2021 hedge fund letters, conferences and more
Warren Buffett’s $10 Billion Mistake
1) Nobody is a greater admirer of Berkshire Hathaway (BRK-B) CEO Warren Buffett than I am… But that doesn’t mean I always agree with, much less follow, his moves in the stock market.
For example, when he started buying IBM (IBM) in 2011, I publicly said the stock was a value trap and privately wrote to him, outlining the reasons I thought he should sell it. (He roughly broke even before dumping it six years later.)
More recently, I bought a basket of seven airline stocks for my personal account in the middle of March last year, at close to the market bottom, which did splendidly. I sold them much too soon (in June and November), but at least I didn’t panic and sell them when Buffett disclosed at his annual meeting on May 2 that he’d dumped all of his airline shares.
Lastly, I’m still holding onto the basket of six bank stocks I bought in March 2020. As a group, they’re up 80% versus 61% for the S&P 500 Index, with nearly all of these gains in the past five months, so I’m glad I didn’t sell as Buffett sold off most of his financial stock holdings last year, which, as this Barron’s article notes, was Warren Buffett’s $10 Billion Mistake. Excerpt:
Berkshire Hathaway CEO Warren Buffett soured on many bank stocks last year. That decision cost Berkshire about $10 billion, given the strong rally in the sector in recent months, Barron’s estimates.
During 2020, Berkshire Hathaway sold positions in JPMorgan Chase (JPM), Goldman Sachs (GS), PNC Financial Services (PNC), and M&T Bank (MTB), while sharply reducing a longstanding holding in Wells Fargo (WFC).
The sales of bank stocks were one of Buffett’s investment miscues during a year of mistakes and missed opportunities. Berkshire also sold about $6 billion of airline stocks near the sector’s low last April. The four major airline stocks formerly held by Berkshire have since roughly doubled.
My point here isn’t to criticize Buffett – a few mistakes don’t change the fact that he’s the greatest investor of all time, nor do they mean that he’s lost his touch.
Rather, I want to underscore the importance of thinking independently. As I wrote in my November 17 e-mail, in which I analyzed Berkshire’s third quarter 13-F regulatory filing, which showed continued sales of bank stocks: “It feels strange to be on the other side of a trade from Berkshire’s legendary CEO Warren Buffett by being bullish on bank stocks, but I’m not deterred.” That’s the key. To quote Buffett himself:
You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right – that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.
SoftBank to Take 40% Stake in Norway’s AutoStore
2) There are a lot of exciting developments occurring in the field of robotics, which I’m following closely.
Japan’s SoftBank just bought 40% of Norwegian warehouse-automation company AutoStore for $2.8 billion, valuing the company (including debt) at $7.7 billion: SoftBank to Take 40% Stake in Norway’s AutoStore. Excerpt:
AutoStore’s technology makes it possible for warehouses to be operated almost entirely by robots. The company was founded in 1996 and pioneered a system of densely storing and accessing goods that is widely used today.
It employs giant cubes packed with bins. Robots, but not humans, can travel across the top of the cubes, digging out bins and delivering them to stations where workers assemble orders. It is especially useful in smaller warehouses, which are proliferating in a race to speed up the delivery of goods to consumers in cities.
The company, which expects to turn a profit in 2021, has benefited as manufacturers embrace technology as a way to cut costs and as e-commerce touches more parts of everyday life – whether shopping for clothes, groceries, or household essentials. AutoStore’s customers include John Deere, Gucci, and Texas Instruments, according to the company’s website.
Another exceedingly cool robotics company is Boston Dynamics, whose three-minute video of its robots dancing to the classic song “Do You Love Me?” went viral at the end of last year, with more than 30 million views to date. Trust me, it will put both a smile and a look of amazement on your face!
On Sunday, March 28, Anderson Cooper of 60 Minutes (who interviewed me for the Lumber Liquidators story in 2015 – you can watch the video here) took an in-depth look at the company: Boston Dynamics: Inside the workshop where robots of the future are being built. Excerpt:
Boston Dynamics is a cutting-edge robotics company that’s spent decades behind closed doors making robots that move in ways we’ve only seen in science fiction films. They occasionally release videos on YouTube of their life-like machines spinning, somersaulting or sprinting, which are greeted with fascination and fear. We’ve been trying, without any luck, to get into Boston Dynamics’ workshop for years, and a few weeks ago they finally agreed to let us in. After working out strict COVID protocols, we went to Massachusetts to see how they make robots do the unimaginable.
From the outside, Boston Dynamics headquarters looks pretty normal. Inside, however. it’s anything but. If Willy Wonka made robots, his workshop might look something like this. There are robots in corridors, offices, and kennels. They trot and dance and whirl and the 200-or-so human roboticists, who build and often break them, barely bat an eye.
60 Minutes also posted this additional five-minute video: What is the future of robotics?
The First Mobile Phone Call
3) Here’s a cool piece of trivia:

Best regards,

The ESG Case For Sovereign Bonds

7, 2021

11 min read

This story originally appeared on ValueWalk

Since the publication of BlackRock CEO Larry Fink’s 2020 letter, environmental, social, and governance (ESG) investing has broken into the mainstream. Despite its size (103 billion USD), ESG investing has largely neglected the fixed income (FI) market, which remains dominated by sovereign debt.
Investors who seek environmental and social outcomes (and can tolerate risk) should incorporate sovereign bonds, particularly from emerging markets, into their portfolios.
This article overviews the key differences between ESG equity and FI investing and provides examples of material E, S, and G issues as they pertain to sovereign debt. It also highlights key challenges and opportunities of ESG integration into sovereign debt moving forward.
Stakeholder investing
Governments often deficit finance to provide services for their citizens. Nowhere is this clearer than the current COVID-19 pandemic, in which developed market (DM) and emerging market (EM) governments alike are running up their national debts in order to mitigate the public health and economic fallout.
Purchasing corporate bonds of certain companies, such as clean energy producers, may also yield favorable stakeholder outcomes. However, selecting such companies is a roundabout and time-intensive effort compared to purchasing sovereign bonds for the following reasons:

Governments provide services that the private sector cannot easily deliver on the country scale (e.g. education, infrastructure).
A government typically has more stakeholders than an individual company.
The same dollar invested in sovereign debt is more likely to directly translate into public services/goods than in equity.

However, this statement presumes that the appropriate sovereign issuers are chosen, and in that selection process is where ESG can make its greatest contribution.
ESG in Equities vs. FI
“Because a bond cannot exceed its face value, fixed income investment centers on reducing downside risk – which ESG is uniquely positioned to assist”
Why is the FI market so behind the equity market in terms of ESG? It’s partly the result of the traditional view that government bonds themselves are risk-free assets.
Rating agencies such as S&P and Moody’s are beginning to integrate sustainability into their credit ratings. ESG integration in FI differs from equities in key ways:

Unlike equities, a bond’s ultimate value cannot exceed its face value. This translates into greater focus on reducing downside risk with FI than maximizing upside potential. Since ESG provides insight into material risks not captured by traditional financial analysis, it may even be better suited towards FI evaluation than equities.
Bondholders have less engagement opportunities relative to shareholders. At the corporate level, bondholders are unable to promote the adoption of ESG-related issues and/or voice other concerns at annual shareholder meetings. These opportunities are even scarcer at the sovereign level.
Macroeconomic factors such as interest rates, inflation, and safe-haven flows have a stronger impact on sovereign credit yields than ESG risks.

Governance issues are considered the most material of the three categories and have long been incorporated into traditional credit ratings of sovereign debt. The Principles for Responsible Investment (PRI) group material factors into the following categories:

Source: PRI
Are DMs safe from governance risks? Not necessarily. Although they are considered to be more severe/prevalent among EMs, DMs are still exposed:

A notable among these DMs is political gridlock, which can prevent governments from passing structural economic reforms, along with legislation that can reduce these issuers’ environmental and social risks.
Certain EMs have proven resilient to governance and their associated credit risks. For example, Sri Lanka’s 2018 constitutional crisis briefly led to an increase in the country’s borrowing costs (measured by dollar-pay spread to Treasuries). In the end, the Sri Lankan Supreme Court upheld the rule of law, which was rewarded by a decline in the country’s borrowing costs of a similar magnitude.

Social factors are a proxy for human capital development, which has been widely documented to spur economic growth. Some social indicators, such as demographics, living standards, and healthcare spending, are already factored into sovereign debt evaluation, albeit less so than governance factors.
The PRI categorizes relevant social factors for sovereign issuers into the following:

Source: PRI
In the past, the relative strength of DMs institutions was assumed to mitigate social risks. However, economic inequality combined with rising sectarian tensions, in part a backlash to demographic changes, has led to the rise of populism across Western countries.
Concerningly, some of these governments’ bonds are considered safe haven assets, underscoring the need for investors to remain vigilant in their credit evaluations.
Environmental factors are typically considered the least material to sovereign debt issuers and thus are the least integrated. However, as climate change (and other global environmental issues) impact the world physically and socioeconomically, the E pillar stands to become increasingly relevant to sovereign debt investors. The PRI categorizes relevant environmental factors into the following categories:

Source: PRI
Natural capital management and climate change pose a series of unique challenges, such as timescale and transition risk:

Risk Management Solutions (RMS) estimates wildfires in 2020 cost $7 to $13 billion in direct insurer costs across four US Southwestern states. The costs of extreme weather events may be even greater in the future if they permanently diminish the states’ economic output potential. The same can be said of developing countries, where changing weather patterns may lead to reduced agricultural output, which can translate into reduced economic activity and food insecurity.
According to Planet Tracker’s 2020 report “The Sovereign Transition to Sustainability”, a high deforestation scenario which results in decreased rainfall could cause a 0.5% government revenue loss due to decreased soybean yields, Brazil’s primary export.
28% and 34% of Argentina and Brazil’s sovereign bonds, respectively, will be exposed to an anticipated tightening of climate and anti-deforestation policy in this decade. These figures emphasize the need to transition to sustainable agricultural practices, the primary driver of deforestation and land degradation.
Rising sea levels in densely populated regions threaten to displace human capital, increase government expenditure, and lower economic growth in the long-run. For low-lying countries such as Bangladesh, sea level rise may hinder their ability to repay external debt.
Countries whose balance sheets are heavily dependent on hydrocarbons (e.g. Saudi Arabia, Russia) are at a particularly high credit risk if they fail to quickly and effectively transition to a low-carbon economy.

ESG Sovereign Credit Ratings
“Good governance is therefore a necessary precondition to proper social and environmental scoring”
Are these findings discussed above supported by the data? Preliminary research by BlackRock indicates a significant relationship between ESG performance and sovereign credit spreads.
Because many of the pertinent sustainability metrics are slow-moving and only reported on an annual basis, the BlackRock team used a proprietary big data approach to work around this limitation. Their methodology is described as follows:

BlackRock leveraged software that sorted through thousands of news articles and measures to search for 1) the frequency of keywords related to each ESG pillar and 2) the sentiment score associated with the content.
Using a weighting system, the team assigned each issuer an overall ESG score to the bonds of 60 DM and EM issuers.
In a hypothetical model, they found that ESG rating explained up to 25% of variation in sovereign spreads. The study also found that for all maturities examined, ESG had greater explanatory power than traditional credit ratings by agencies such as Moody’s’ or Fitch.

While innovative, such an approach is limited in application due to its reliance on news sources. Countries that score poorly on journalistic freedom and freedom of speech, as aforementioned in the Governance section, are more likely to produce content skewed in favor of the governments’ policies.
Unless analysts manually screen for biased content such as state-sponsored news outlets, BlackRock’s approach would result in artificially inflated ESG scores. Relying on outside sources is an option, but they may lack important “inside” knowledge and/or cultural context.
Good governance is therefore a necessary precondition to proper social and environmental scoring. Without ESG ratings that reflect the actual performance of a country across the three pillars, it is difficult to determine the extent to which ESG explains credit spreads.
Although ESG reporting in EMs has improved in recent years, investors will be limited in the number of EM issuers they can faithfully put their money in. This may create a situation in which the countries whose stakeholders are most in need of sustainable investment may be the ones investors must shy away from.
“Investors may leverage engagement to push for improved ESG disclosure and alignment from sovereign issuers but must avoid the appearance of lobbying and/or interference in governments’ policies”
Sovereign debt investors may be able to leverage engagement with issuers to push for ESG transparency, among other demands. Several mechanisms already exist for engagement:

In democracies, governments often meet with investors prior to the unveiling of annual budgets and medium-term fiscal plans in order to provide clarification and details.
Governments and debt management offices (DMOs) may host roadshows to promote new bond issues, non-deal roadshow meetings, and ad-hoc events, although the latter is more common among safe-haven countries and large issuers such as China.
Institutional investors have long conducted country research trips, which provide valuable opportunities to meet with various country stakeholders and assess the situation “on the ground.”

These forums are avenues for investors to push demands. However, engagement has had a mixed record thus far.

In 2017, investors and a PRI Sovereign Debt Advisory Committee member started pushing Mexican central bank officials to improve their communications surrounding monetary policy decisions. These concerns were taken seriously, and in April 2018 the monetary authority announced it would start publishing the governing board’s voting records after monetary policy meetings.
Nordea Asset Management suspended its purchases of Brazilian government bonds in response to the 2019 Amazon wildfires. With a then exposure to Brazilian sovereign bonds of 111 million USD, Nordea’s announcement caught the attention of Brazilian decision-makers, who subsequently invited its leadership to a meeting with government officials in Helsinki. Nordea was later backed by a group of institutional investors with a combined 4.6 trillion USD in assets under management (AUM). Despite their efforts, deforestation fires increased by 23% from 2019 to 2020.
In 2020, a 23-year-old student filed a class-action lawsuit against the Australian government for failing to disclose climate-related risks to its sovereign bond investors. It remains to be seen whether the ongoing lawsuit will alter the AAA rating the bonds currently enjoy and/or change investors’ perceptions.

The COVID-19 pandemic provides an opportunity for investors to leverage their influence and push for greater ESG disclosure and sustainability practices. However, even the PRI acknowledges that investor engagement can be viewed as lobbying or attempting to interfere in governments’ policy choices.
This is a serious concern. In transactions between asset managers and banks in the Global North and sovereign issuers in the Global South, investors must avoid even the appearance of a neocolonial relationship.
Such interactions would be counterproductive to the goals of responsible investors. One can argue that government officials who are more preoccupied with appeasing foreign investors than serving their own citizens is a sign of poor governance.
ESG investment in sovereign bonds has lagged significantly behind equities and even corporate bonds. Currently, only a handful of ESG-aligned sovereign FI indices exist.
Chief among them are the JPMorgan Emerging Market (JESG EMBI) Indexes, Climate-adjusted FTSE Russell Global Government Bond Index (WGBI), and S&P ESG Pan-Europe Developed Sovereign Bond Index.
Nonetheless, this asset class is rapidly catching up.
An analysis by Charles Schwab indicates that EM allocation (specifically in US-dollar-denominated debt) to a fixed income portfolio can increase returns while providing diversification. This comes at the price of higher risk, but ESG can mitigate that.
Governance risks, followed by social risks, remain the most material in the context of sovereign debt, while environmental risks will become more relevant in the decades to come.
Several key challenges remain with sovereign debt investing. These range from unreliable/missing data to the dominance of macro factors to ethical concerns over sovereign engagement.
However, rising interest from investors and investors alike, coupled with increasing research into the area, bodes an optimistic future for sovereign debt. For investors who are willing to incur higher risk in hopes of higher returns, ESG investing in sovereign debt provides a valuable avenue to create tangible impact and chart a sustainable future.

The Moderna Pullback is Worth a Shot

7, 2021

5 min read

This story originally appeared on MarketBeat

A little over two years ago Moderna (NASDAQ:MRNA) was a relative unknown in the world of investing. The Massachusetts-based biotech company was making its public market debut hoping investors would take to its novel approach to drug and vaccine development. My how times have changed.
Moderna is now a household name among investors and non-investors after beating out dozens of companies vying to create a COVID-19 vaccine. Its stock price climbed to nearly $190 in February 2021 on expectations of a major windfall. It has since pulled back more than 30% presenting an intriguing entry point for a company with growth potential that goes well beyond the coronavirus.
What are Moderna’s COVID-19 Prospects?
Along with Johnson & Johnson and Pfizer-BioNTech, Moderna’s COVID-19 vaccine is one of three that have been approved in the U.S. and is being administered in other countries. It’s a remarkable accomplishment to be in the company of these pharmaceutical giants, and one that has certainly placed Moderna on the map.
With vaccine distribution well underway, the company’s upcoming financial results should be outstanding. Moderna has raked in more than $18 billion worth of purchase agreements for its vaccine and is bracing for the likelihood that many more are on the way.
This week drug manufacturer Catalent announced that it is expanding its production of Moderna’s COVID-19 shot. The agreement will almost double the output of the vaccine at Catalent’s Indiana plant effective this month to approximately 400 vials per minute. At this pace, an additional 80 million vials will be filled annually.
But Moderna isn’t stopping there. Recognizing the shortfalls of its two-dose COVID-19 regimen, it is also developing a one-shot vaccine that can be stored in a regular refrigerator. Positive results from that ongoing study could help the stock make another run at the $200 level.
So too could Moderna’s progress with yet another COVID-19 vaccine. This next-generation COVID-19 vaccine is intended to address the potential for more variants of the coronavirus. With global variants of the disease threatening to setback the economic recovery, there is a clear need for more powerful coronavirus vaccines—and Moderna is once again a step ahead of the competition.
What Other Growth Opportunities Does Moderna Have?
Moderna may forever be linked to COVID-19, but eventually, the pandemic will fade into the history books. The company will return to focusing on developing other therapeutics and vaccines based on its messenger RNA (mRNA) technology.
A mRNA vaccine is a new way to protect people from infectious diseases that it doesn’t introduce a weakened germ in the body. Instead, they train cells to make a protein that triggers an immune response. The approach has all sorts of potential for vaccinating against infectious diseases, heart disease, immune disorders, and even certain cancers.
Moderna’s development pipeline includes several promising early and mid-stage candidates. More than half of its 24 mRNA candidates are in clinical studies. Earlier this year it launched three new vaccine programs designed to target the seasonal flu, HIV, and Nipah virus. It also announced a partnership with Vertex Pharmaceuticals to develop a novel cystic fibrosis treatment.
The most exciting program underway at Moderna may be its collaboration with Merck. This involves its personalized cancer vaccine candidate that targets a patient’s specific tumor in conjunction with Keytruda. Late last year it released positive phase 1 data from a trial involving patients with head and neck squamous cell carcinoma (HNSCC).
 Is it a Good Time to Buy Moderna Stock?
Now back down to around $130 per share, Moderna’s risk-reward profile is more palatable. On the risk side of the equation, there is of course ongoing headline risk around the company’s current COVID-19 vaccine. Although things seem to be going smoothly, negative news about side-effects or production setbacks could put downward pressure on the stock. And as with any biotech company, there is the omnipresent chance that clinical development setbacks spark a selloff.
The reward part is rather straightforward. Moderna has supply agreements in place all over the world that represent hundreds of millions of its COVID-19 vaccine doses. What’s less certain is whether it will be successful in developing a one-shot vaccine. Given the high efficacy rate of its current vaccine and the money being poured into the one-dose development it’s hard to envision this not becoming a success.
As the dark horse in the COVID-19 vaccine race, the market should know better than to discount Moderna’s potential for commercializing more coronavirus solutions as the pandemic continues to take twists and turns. Looking further down the road, having greater financial resources and institutional backing should increase its chances for success in other disease and cancer areas.
Sell-side firms have a mixed view on Moderna which makes sense given the uncertain nature of its business. But while ratings on the stock are all over the place, analyst price targets are decidedly skewed to the positive. Of those firms venturing to make a price prediction, all but three have targets above the current share price. The other eleven firms (including one that has a sell rating) have targets ranging from $140 to $208 with several north of $200.
So, despite its success, Moderna still carries plenty of risk for investors. But given its potential to produce additional COVID-19 vaccines and progress its non-COVID pipeline, at this level, the stock is well worth a shot.