AN ALTERNATIVE TO MONEY MARKET FUNDS
By Don Ames, Sarasota Family Office Association
June is behind us and what a month it was!! Both the S&P 500 and the Nasdaq reached record levels as the bull market continues to run into early July. As of the close of trading on June 30, the Dow Jones Industrial Average (DJIA) was up 12.73% year to date. The S&P 500 was up 14.41% and the Nasdaq was up 12.54% year to date.
Last Friday’s Nonfarm Payroll Report (NFP) was a big improvement over the May report as 850,000 jobs were added, well above the forecast of 720,000. The U-3 unemployment rate rose slightly to 5.9% from 5.8% in May. The U-6 rate finally dipped below the 10% level to 9.80% while the Labor Participation Rate held steady at 61.6%. Let’s see if it improves when the next NFP report is released on August 6.
The Fed met in June and made clear at its June 16 press conference it would continue its accommodative policy. These comments seem to have soothed bond investors’ concerns with the yield on the 10 Year US Treasury ending @ 1.47% on June 30. The Fed will next meet on July 27-28.
Warren Buffett and his firm, Berkshire Hathaway, made headlines on several fronts over the past couple of weeks. Last month, Buffet resigned from the Board of the Bill & Melinda Gates Foundation. Mr. and Mrs. Gates previously announced they are divorcing. In May, Buffet made headlines after disclosing that Berkshire Hathaway increased its stake in Kroger (KR). Berkshire is now the 3rd largest shareholder in KR with a 6.8% stake, trailing both Vanguard (9.8%) and BlackRock (7.0%). Finally in late June, the Gordon Haskett research firm reported a jet owned by Hershey (HSY) was spotted at the Omaha airport. Omaha of course is where Buffett lives.
Let’s look at KR and HSY. It is no secret that both Target (TGT) and Amazon (AMZN) would like to expand their brick & mortar footprint in the grocery and pharmacy markets. In fact, in March 2018, Reuters and other news outlets reported TGT and KR held merger talks. Both TGT and AMZN are substantially larger than KR in market capitalization. TGT’s market cap is $120.45 billion and AMZN’s market cap is $1.73 trillion while KR’s market cap is $28.49 billion. KR has little in the way of takeover defenses. Its Board is elected annually while company insiders own less than 2% of the shares. HSY is a different story. Its market cap is $36 billion. Buffett’s Berkshire Hathaway reported last month cash on hand of $140 billion. Clearly, it has the cash to do a deal for HSY. But, any deal would have to be friendly since the Hershey Trust controls the company via its Class B shares