🎙️ Giving Spree

Stock correlations remain at remarkably low levels, transforming the environment into a “market of stocks.”

In other words, stocks are charting their own course, as evidenced by the growing disparities between the market’s top performers and underperformers. Super Micro Computer (+195%) and Nvidia (+157%) are flying this year, while laggards like Lululemon (-41%), Nike (-30%) and Walgreens (-55%) can’t catch a break.

The divergence highlights how there’s the potential for both big gains and big losses in 2024. Stock correlation within the S&P 500 is approaching 20-year lows, as shown by today’s chart below.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Howard Marks, rates, and commercial real estate

• A preview of Warren Buffett’s will

This, and more, in just 5 minutes to read.

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In The News

🤔 Howard Marks, Rates, and Commercial Real Estate

Howard Marks has spoken again. Oaktree Capital Management recently held its biennial client conference for 2024, featuring presentations from key leaders, including co-chairman Howard Marks and co-CEOs Robert O'Leary and Armen Panossian. The conference covered several topics in the investment landscape, including the future of private credit, opportunities in India's corporate debt markets, and a potentially enormous opportunity in commercial real estate.

Here are some takeaways:

Marks suggested that using the same strategies in different economic environments is unwise. He reiterated that the investment landscape has drastically changed, and investors should adapt their approaches accordingly.

As Marks has written in the past year, the period from 2009 to 2021 was characterized by declining and ultra-low interest rates, leading to the longest economic recovery and bull market in history. The environment was favorable for asset ownership and borrowing.

He believes that era has ended, and this investment climate offers different opportunities, such as fixed income investing, which Marks said “may be better positioned today in risk/return terms than equity investing.”

Here’s Marks: “Liquid credit instruments currently offer yields in the high single digits, and the yields on private credit are in the low double digits. These yields are highly competitive with the excellent historical returns on equities. (The S&P 500 Index has an average annual return of roughly 10% for the last 100 years.)

He continued, “These yields also exceed most investors’ required returns and are considerably less uncertain than the returns on equity and other ownership strategies. In other words, they have a high probability of delivering what they promise.”

Other big-picture takeaways from Oaktree:

• Commercial banks are reducing asset financing activities due to regulations and economic factors, and alternative lenders can gain market share in the $5 trillion asset-backed finance market.

• India's underdeveloped credit markets present a $300 billion opportunity for private debt investors. The firm is bullish on the country overall, noting: “We believe that India is well positioned to continue its rapid economic expansion, due to many supportive economic and geopolitical trends…Over the past two decades, India’s economy has grown by 13% annually, and, as a result, it is now the world’s fifth-largest economy, having jumped six places in ten years.”
  

• The U.S. commercial real estate market is facing significant distress, potentially creating one of the largest investment opportunities in 40 years. The firm concludes, “Today, we think few asset classes are as unloved as commercial real estate and thus, we believe there are few better places to find exceptional bargains.”
  

• Many U.S. banks, especially smaller ones, are at risk due to their exposure to devalued commercial real estate assets. “Valuations in the office sector have declined by 56%, on average, from their previous peak, while values in the multifamily and industrial sectors are down by 33% and 26%, respectively,” Oaktree’s global head of real estate said.
  

• Real estate investors may find opportunities to lend at depressed valuations while financing properties with strong fundamentals.

Read more

More Headlines

🤖 Morgan Stanley advisors tap AI to do the ‘grunt work’

💼 Why do people really quit their jobs?

👟 Nike’s woes continue as stock plunges 20%

🏢 About one-quarter of all U.S. office space might soon be empty

🏘 The world’s least-affordable housing markets in 2024, mapped

💸 Goldman: Hedge funds are selling tech stocks ‘aggressively’

📈 Nvidia’s Jensen Huang addresses competition after historic stock rally

💰 Warren Buffett Gives a Preview of His Will

Warren Buffett, who turns 94 in August, has made his largest annual charitable donation to date, giving away $5.3 billion worth of Berkshire Hathaway shares to five charities. This donation involved converting 8,674 Class A shares into over 13 million Class B shares.

Giving spree: This week, Buffett is giving about $4 billion in Berkshire shares to the Bill & Melinda Gates Foundation, plus $400 million to the Susan Thompson Buffett Foundation, named after Buffett's late first wife. Each of the foundations run by Buffett's three children — Susie, Howard, and Peter — will receive shares valued at more than $280 million.

• The distribution reflects Buffett's long-standing commitment to philanthropy and his strategy of donating large portions of his wealth to carefully selected charitable organizations.

Lucky duck: Buffett, the "Oracle of Omaha," has been making annual donations to the five charities since 2006 as part of his pledge to give away his fortune. After this donation, Buffett retains ownership of 207,963 Class A shares and 2,586 Class B shares, valued at roughly $130 billion.

In an interview with The Wall Street Journal, Buffett revealed his plans for his wealth after his death. He intends for his three children to oversee a new charitable trust that will inherit almost all of his wealth. The trust will focus on helping those less fortunate than him.

• “It should be used to help the people that haven’t been as lucky as we have been,” he said. “There’s eight billion people in the world, and me and my kids, we’ve been in the luckiest 100th of 1% or something. There’s lots of ways to help people.”

Buffett also disclosed that the Bill & Melinda Gates Foundation will no longer receive donations after his passing. The decision follows his resignation as a trustee from the Gates Foundation in 2021 amid Bill and Melinda Gates' divorce. (Over the years, Buffett has poured tens of billions into the foundation.)

Why it matters:

Buffett changed his will several times and arrived at the current plan when he saw how much his children have matured. 

Susie Buffett, 71, resides in Omaha and chairs two foundations: the Sherwood Foundation, which focuses on early childhood education and social justice initiatives, and the Susan Thompson Buffett Foundation, named after her late mother, which supports reproductive rights and provides college scholarships.

Howard Buffett, 69, lives in Decatur, Illinois, where he farms and leads the Howard G. Buffett Foundation. The organization concentrates on food security, conflict mitigation, and combating human trafficking. Both Susie and Howard serve on the board of Berkshire Hathaway.

Peter Buffett, 66, is a music composer near Kingston, New York. He heads the NoVo Foundation with his wife, Jennifer, which collaborates with indigenous communities, among other projects.

• All three Buffett children are actively involved in philanthropic work, each focusing on social impact areas and carrying forward their family's legacy of giving.
  

• “I feel very, very good about the values of my three children, and I have 100% trust in how they will carry things out,” Buffett told WSJ. “I like to think I can think outside the box, but I’m not sure if I can think outside the box when it’s 6 feet below the surface and do a better job than three people who are on the surface who I trust completely.”

Look ahead: Buffett had already designated Greg Abel, Berkshire's vice chairman for non-insurance operations, as his successor. Buffett has also said he plans to make his will public upon his death to emphasize transparency and simplicity in the management of his estate.

Said Howie Buffett: “Somebody’s going to have to take responsibility for the amount of money he wants to put into a charitable foundation. I think it’s a privilege to do it.”

Read more

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Quick Poll

On Monday, we asked: Do you directly own Amazon shares? Why or why not?

— More than half of readers own shares in Amazon directly. Answers included, “It's a great company with significant competitive advantages.” And, “Fundamentals are quite great, all time highs, A.I. integration, nowhere to go but up.”

— Other Amazon shareholders wrote, “I've owned mine for over 20 years. If it hasn't collapsed by now, I don't think it ever will. So I'm not selling. Yet.” Added another: “Amazon is a black hole sucking in every business around it, and, in my opinion, will be the Berkshire Hathaway of this generation.” Yet another: “They are the clear leader in cloud and continue to iterate on prime which is a phenomenal value to members.”

— On the other end, people wrote things like, “I own Microsoft outright and Apple through Berkshire holdings. I feel additional Magnificent 7 holdings would overweight me and keep me from taking advantage of mid to micro-cap opportunities.” Another reader simply stated: “Rich valuation.”

See you next time!

That's it for today on We Study Markets!

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