CWS Market Review – April 12, 2022

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Change That: Elon Musk Won’t Be on Twitter’s Board

In last week’s issue, I discussed Elon Musk taking a large stake in Twitter and being invited to join its board. The stock soared 30% in one day which helped the richest man in the world become even wealthier. Musk agreed not to own more than 14.9% of the company.

That story got an update this week. Twitter said that Mr. Musk will not join its board.

What happened? We don’t know the precise details, but I’m assuming the lawyers had a long talk with Musk and explained that even he can’t do some things as a board member. A board member has a fiduciary obligation to act in the best interest of the shareholders.

That could be a wee bit of a problem for someone like Elon. For example, Musk suggested turning Twitter’s San Francisco headquarters into a homeless shelter. Make of that what you will. Musk also suggested deleting the “w” from Twitter’s name. You can see how this kind of behavior might be…problematic.

As a board member, Musk would be banned from trolling the company or from commenting on non-public information. This is hardly the first time that Musk’s tweets have gotten him in hot water.

In 2018, Musk famously tweeted that Tesla had “secured” a buyout offer. For that, the SEC fined him $20 million. That would be like levying a fine of $10 on a person with a net worth of $140,000.

Personally, I’m a big fan of Elon. I like the idea that there’s a multi-zillionaire who goes out and says whatever he likes. I also realize that a good part of Musk—say, 30%— is pure showman. He’s often closer to P.T. Barnum than he is Ford or Edison. Of course, those folks were part-showmen, too.

There’s also an important angle to this in that the founders of Twitter never bothered to structure the company to prevent it from being taken over by activist investors. Alphabet, the parent company of Google, has different voting classes of stock which are designed to prevent someone on the outside from taking over the company. Facebook has also prevented itself from being easily pushed around.

All in all, I don’t like these dual-class structures. The argument used to be made that it could be important for some companies, such as newspapers, that needed to be protected from outside shareholders. Years ago, some companies viewed themselves as guardians of the public trust. Naïve? Probably, but they believed it. I suppose there’s an argument to be made for dual classes, but I’d much rather see regular shareholders treated best.

There’s perhaps some irony in that Elon Musk can probably best serve shareholders off the board and make his feelings known without restrictions. How else? Via Twitter.

Inflation Jumps to Highest Since 1981

We had another inflation report this morning and it was a doozy. I’ve become used to saying that inflation has soared to its highest level since 1982. That’s now changed. Thanks to the March inflation report, we can now say that inflation is at its highest level since December 1981.

The report said that last month, headline inflation rose by 1.24%. That brought the 12-month rate to 8.56%. At the current rate of inflation, for a $1 million portfolio, inflation eats up $85,575 per year. For the Dow Jones Industrial Average, inflation gobbles up 3,000 points every year.

Most disturbingly, at the current rate of inflation, if you’re paid in dollars, you effectively work one month of the year for free. That’s all due to inflation.

Here’s a chart of headline inflation in blue and core inflation in red:

The stock market responded by rallying more than 1.3% this morning. It later thought things over and decided that wasn’t a good idea. The market retreated for a daily loss of 0.34%. In the last 10 sessions, the S&P 500 has lost a little over 5%. The yield on the 10-year Treasury got all the way up to 2.77% today. Of course that’s still low, but it‘s a lot higher than where it was two years ago. The average 30-year mortgage rate is now up to 5.25%.

You can see that inflation truly causes chaos for an economy. Here’s a quote to ponder from John Maynard Keynes:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth.

This morning’s inflation report was also noteworthy because it’s the first report to be impacted by the war in Ukraine. Energy prices were up 11% last month. Not annualized, but for the whole month.

If there’s any consolation, it’s that core inflation appears to be far more modest. Last month, consumer prices excluding food and energy rose by just 0.32%. That’s really not so bad. Over the past year, core inflation is running at 6.44%. That’s the highest since August 1982, which happens to be the same month the stock market reached a generational low.

This low core inflation number for March could be good news going forward. I say that very cautiously. The increase for March was the slowest of the last six months, and the fourth-slowest of the last 12 months. If we assume that the headline rate will eventually move towards the core rate, then our inflation problems could be over soon. That’s a lot to assume for now, but it’s worth taking note of.

What’s also interesting is that the 2/10 Spread has backed off significantly over the past few days. On April 1, the two-year Treasury was yielding 0.05% more than the 10-year Treasury. That’s usually a signal of more Fed tightening and slower economic growth. Since then, the 2/10 Spread has turned positive. The 10-year now yields 0.33% more than the two-year. Perhaps the Fed doesn’t have a lot more work to do? Again, it’s too early to draw sweeping conclusions, but it’s not to be ignored.

My Mistake with AmerisourceBergen

We all learn from our mistakes including me. To quote Freddie, “bad mistakes, I’ve made a few.” I find it useful to go over my past errors and try to learn from what I did wrong.

I made a big one this year. In January, I told you how I strongly considered adding AmerisourceBergen (ABC) to our Buy List, but ultimately, I decided to pass. The stock is up over 20% this year. Smooth move, Eddy!

Here’s some of what I wrote:

There’s a lot to like about AmerisourceBergen. If you’re not familiar with the company, ABC is a major drug wholesaler. The company was formed 20 years ago through the merger of Bergen Brunswig and AmeriSource. They also have units offering consulting services and veterinary supply.

It’s a great business to be in. I especially like their smooth earnings line. This is an important characteristic in a successful company. Some businesses see their earnings bounce all around during a business cycle. Other stocks, by contrast, churn out steady increases. All things being equal, the market prefers the steady increases.

The stock is literally ABC. How could I have passed?

Frankly, it’s not the worst of errors to pass on a good stock. As investors, we should be very discerning. My mistake was not realizing how strongly the market would favor stocks with consistent earnings growth. I also didn’t fully realize how the company had addressed its legal issues.

But first, here’s the yearly earnings for AmerisourceBergen:

2017: $5.62
2018: $5.88
2019: $6.49
2020: $7.09
2021: $7.90
2021: $9.26
2022: $10.80 (est.)
2023: $11.60 (est.)
2024: $12.45 (est.)

Those numbers are exactly what we’re looking for. Steady upwards growth. But numbers don’t tell you everything.

While AmerisourceBergen appeared to be inexpensive based on conventional valuations, I was put off by its legal risks for its role in the opioid epidemic. Over a 20-year period, nearly half a million Americans died from opioid addiction.

Last July, AmerisourceBergen and two other drug companies, Cardinal Health and McKesson, reached a major settlement with several state governments. The deal calls for the drug companies to pay $21 billion over the next 18 years. ABC’s portion comes to $6.4 billion. The deal is intended to address, in one big action, more than 3,000 lawsuits. None of the companies has admitted to any wrongdoing.

I’m still not certain if that ends the matter for ABC. So far this year, the stock market appears to be greatly relieved. That’s a decision I felt I couldn’t adequately make in January. Investing is about predicting the future. Instead, it’s about weighing the risks and potential benefits.

The other lesson with investing is to not beat yourself up for “the one the got away.” Chasing it is not the answer. Instead, be patient and wait for the next chance. There’s no game clock with investing. We can pass on as many stocks as we like.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. Q1 earnings season starts soon, and this looks to be another good season for us. Don’t forget to sign up for our premium newsletter.

Posted by on April 12th, 2022 at 7:56 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.