The Dividend Cafe - Wednesday - March 26, 2025

Episode Date: March 26, 2025

Market Update: Growth to Value Rotation, Economic Indicators, and Warren Buffet's Cash Position In this episode of Dividend Cafe from March 26, host Brian Szytel provides a market update from West Palm Beach, Florida. He discusses the market's downtrend, with a notable rotation from growth to value stocks, and highlights strong performance in defensive sectors like healthcare and staples. Economic indicators include better-than-expected durable goods orders. He also touches on potential auto tariffs and volatility in the market. A key point of discussion is Warren Buffet's unusually high cash reserves in Berkshire Hathaway, explaining that it aligns with a prudent investment approach. Brian concludes with insights on the Federal Reserve's likely path on interest rates and the current state of the lending environment. 00:00 Introduction and Market Overview 00:49 Economic Indicators and Market Reactions 02:14 Federal Reserve and Interest Rate Policies 04:18 Warren Buffet's Cash Reserves: Should We Be Worried? 06:06 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Welcome to Dividend Cafe. This is Wednesday, March the 26th. Brian Seitel with you here from West Palm Beach, Florida. In a down day overall in markets, we're off still about 3.5% from the lows, which is to say that we're still down from the highs by a little under 7% roughly. So we've entered a range bound area in this market and I'll talk through that a little bit. But

on the day, big rotation from growth to value, the NASDAQ was down over 2%. Dow was only down one third of 1% if that gives you an idea. So a lot of the defensive names, healthcare staples, those defensive stocks are what performed and were actually up and positive on the day. A lot of the dividend pairs and then all of MAG7 and the like were down far more. So interest rates moved a little. Tenure was up three basis points. Economic calendar, fairly quiet.

We had durable goods orders out that were better than expected meaningfully to up 0.9 versus an estimate of a decline of 1 is a 2% delta and Significant it's a leading indicator into manufacturing these numbers come and go But a positive data point there in durable goods orders nonetheless in what has otherwise been a fairly mixed bag on slowing economic data, interest rate policy, and so forth, obviously trade. There was actually set to be an announcement later this afternoon around auto tariffs

and how that could potentially offset some of the USMCA negotiation on reciprocal tariffs, although I'm always afraid to wait another three hours waiting for it here because you just never know what's going to be said and when. And so I'll be back with you tomorrow to unpack whatever was said in that regard. In the meantime, no announcement as of 4.30 p.m. Eastern on the auto tariff front between Mexico and Canada. Okay, that was an aside. Other than that, volatility has picked up again on the day, but it's down from where it was. We're at a VIX of 18. Anything under 20 is somewhat part

for the course on volatility, but it's just centered solely around next week. We've got an April 2nd deadline on tariffs, on reciprocal tariffs. That's what markets are waiting on, and I suspect it's going to be up and down in the meantime. But all that to say, if you think all things are equal, and this is from the Fed report, opinions aside, this is what our Federal Reserve has shown us in the last report. Unemployment modestly moving higher, growth modestly moving lower, they had inflation modestly higher, all of those things boil down to the path of least resistance being lower interest rate policy over time. I also don't think it's lost on the Fed that the government itself has

$8 trillion worth of treasury is coming due in the next 12 months. So that's a third of the entire book, a third of the holdings, third of the money they owe has to be paid back. So that's a tall order. I'm not worried about them being able to do that. There's plenty of liquidity and borrowing power and all of those things. They'll be able to roll that debt. I'm not overly concerned there.

But what I would say is it's not lost on the Fed that it exists. And then number two, I think what the Fed is more concerned about are some of the real parts of the lending environment inside of the economy, things like mortgage loans, things like auto loans and business loans and just the credit market in general being so tethered to interest rates. And all those things, things by the way are starting to deteriorate. They're not deteriorating in such a way that signifies a recession, but they are weakening slightly and with their other estimates also weakening, I believe that path of least resistance is lower.

That's not saying anything new. That's what's priced in to markets. But I may talk about this a little bit more tomorrow. If you're wondering why real estate prices haven't depreciated when cap rates are going to be lower than borrowing rates, it's because I believe the market itself is also convinced that rates are gonna be moving lower as well.

And so you just have a period of time, a back and forth, the scales of everything good versus the scales of everything bad that's going on in the economy. Right now they're fairly balanced. They're still tilted towards positive. That back and forth is what's causing us to trade a little sideways here and also lower. We're down off of the highs here by, like I said, 7% or so. So that's your market for the day, and that's what we're dealing with now. There was a question in there. I've actually gotten it about three times over the past month.

So I'm assuming there must have been different headlines that have found this thing interesting to write about. But Warren Buffett has about $330 billion in cash in his company, Berkshire Hathaway, in his balance sheet. And that's unusually high for him historically. And so the question I got was, is the sky falling because of that reason, or should we be worried about it?

The short answer is no. And if you look at what, what Warren has to run now, it's a very large balance sheet from years past. It's over a trillion. It's about 1.1, $1.2 trillion. 700 billion of that is invested in risk assets, mainly equity, but also different types of loans and different types of investments in there. On the equity side alone, two-thirds of

it is in six holdings, so it's fairly concentrated. The rest of what is in that balance sheet, a lot of it is illiquid, things like receivables and tangibles, property, buildings, equipment, stuff like that. So having 30% in short-term treasuries earning 4.5%, I don't know that's so outlandish from just a prudent stewardship standpoint. It's the same way that I'm frankly running most client portfolios than any sort of diversity

and any sort of moderate tone in the structure. And if you look at the entire business that we run, it's actually not that dissimilar from that either. I'm with Warren on be fearful when others are greedy and greedy when others are fearful. And I think that's what he's attempting to do here in this market. I think that's fine. I don't treat it so much as a timing mechanism where I would go 100% invested in stocks and then two thirds only invested in stocks. I'd prefer to stay in some form of a balanced allocation always and just rotate between the exposures as markets

present themselves as buying opportunities or feel overvalued for what it's worth. But not that uncommon from how the current structure of the way he's running things is. So that's my take on it and the reason you shouldn't be overly afraid of it. With that, I've gone on long enough. I will let you go for this evening. I encourage the questions. They're always good and I wish you a lovely night. Thank you very much.

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