Why Warren Buffett’s Bet on Apple Feels Far Away From a Payoff

He put his money where his mouth is— Berkshire Hathaway owned 911 million Apple shares at the end of March, making it the conglomerate’s single biggest stockholding. It is ironic that the number is synonymous with emergencies, since that position has lost about $30 billion since then. Apple is down more than 20% this year.

Turns out, Apple is much like every other company when faced with production problems in China and the outlook for weaker consumer spending.

Buffett is probably right that anyone who really wants an iPhone will pay whatever it costs to get one. But the smartphone’s many repeat customers may just as easily decide to delay purchasing a new one as they observe that their money won’t go as far. Shoppers haven’t seen inflation this fast in four decades, and how they react may be surprising.

The Federal Reserve will need until at least 2023 to get inflation back to its 2% target, according to forecasts by the Congressional Budget Office published on Wednesday. So Apple still has time to prove Buffett right about being good to hold in an inflationary environment.

For now, the Fed is hiking interest rates as fast as it dares. Stocks rebounded on Wednesday when minutes showed Fed policy makers thinking about when they can start considering slowing down those increases. But not the Apple stock, which was little changed, on fresh concerns about China.

This year’s performance so far shows that Apple has just as much to gain as everyone else from getting inflation back under control.

—Brian Swint

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Musk Increases His Equity Contribution to Twitter Deal

Elon Musk will put $6.25 billion more equity into his deal for Twitter , raising that portion to $33.5 billion, and he will no longer rely on a margin loan backed by Tesla shares, which have shed nearly one-third of their value since late April. Twitter shares jumped 6% after hours.

• Musk lined up $7.14 billion from 19 investors as of early May to back his $44 billion purchase, but then he said the deal was on hold while he figured out how many fake accounts were on the platform. Twitter CEO Parag Agrawal said on Wednesday the company is proceeding with the deal.
• Agrawal, speaking at Twitter’s annual shareholder meeting, deferred answering other questions on the deal to a later date. Twitter’s board has said it is committed to completing the acquisition at $54.20 a share in cash. Twitter’s shares closed at $37.16, 31% below that deal price.
• Since disclosing his stake in Twitter, Tesla’s stock has dropped about 45%, costing Musk about $87 billion in wealth. His remaining 163 million shares are worth about $102 billion.
• Musk has to decide his next step in this saga. Twitter shareholders are expected to approve, but “Tesla investor patience is wearing very thin,” wrote Wedbush analyst Dan Ives in a research note. He said Twitter’s board might be willing to accept a lower price amid market pressures.

What’s Next: Twitter is planning to schedule a special meeting for the acquisition vote, but hasn’t announced a date or details. The company’s buyout agreement with Musk includes a $1 billion breakup fee that either side could pay the other if the deal falls through.

—Janet H. Cho and Barron’s Staff

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Abbott’s Michigan Plant to Resume Making Baby Formula

Abbott Laboratories plans to resume baby formula production at its Sturgis, Mich., plant on June 4, focusing on making its EleCare specialty formulas for infants and children who can’t tolerate other formulas. It said it anticipates those products to be available to consumers starting around June 20.

• Abbott will also release limited quantities of EleCare and EleCare Jr. held back after its Feb. 17 recall, which have been specially tested to make sure they are safe. Abbott said they would be enough for current patient needs until new formula supplies are available.
• Food and Drug Administration Commissioner Robert Califf told a House Energy & Commerce committee hearing that the FDA’s response to a whistleblower’s safety concerns about Abbott’s plant in Sturgis, was “too slow.” The whistleblower raised the concerns in October, and the plant shut down in February.
• Committee Chairman Frank Pallone, Jr. (D., N.J.) said the nationwide formula shortage shows the U.S. relies on too few manufacturers for this critical need. Three companies, including Abbott, control 95% of the market.
• Christopher Calamari, a senior vice president at Abbott, told House lawmakers that Abbott has averaged six to eight flights a day, each carrying 132,000 cans of formula from its FDA-registered facility in Cootehill, Ireland. Abbott is also making formula at its plants in Ohio, Arizona, and Virginia.

What’s Next: Pallone said the FDA’s food safety efforts are “chronically underfunded, under-resourced, and understaffed,” and that the committee is sending a bill to help the FDA better recruit and retain staff, improve transparency and reporting, and more quickly respond to contamination reports.

—Janet H. Cho

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Commentary: Bernanke on Why the Fed Didn’t Act Faster

Despite warnings by former Treasury Secretary Larry Summers and others, the Federal Reserve didn’t act swiftly to stifle inflation. Ben Bernanke, former Fed chair, explains why in a Barron’scommentary.

• “The pandemic scrambled usually reliable indicators of labor market strength,” Bernanke writes. The unemployment rate in June 2021 was 5.9% and millions fewer people held jobs than before the Covid-19 pandemic.
• In mid-2021, Fed policy makers saw the economy as still far from full employment,” he adds. In hindsight, that was a mistake.
• It’s now clear that the labor market was “more robust than conventional measures suggested,” Bernanke writes, as is evident in sharply rising wages and the difficulty of employers in finding workers.
• Had the Fed seen the labor dynamics more clearly, it might have moved sooner to raise rates and shrink its balance sheet. Instead it’s playing catch-up.

What’s Next: That is a problem the Fed will need to fix, Bernanke writes. It needs new tools to “more explicitly acknowledge the difficulty not only of forecasting full employment but of identifying it when it occurs.”

—Matt Peterson

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Fed Eyes More Half-Point Rate Hikes in Coming Months

Minutes from the Federal Reserve’s last meeting showed officials wanting to bring down inflation quickly with half-percentage-point interest-rate increases at the meetings in June and July but then basing their moves after that on data that is already signaling a slowing economy.

• The Federal Open Market Committee will next meet June 14-15 and then July 26-27. The Fed hopes to become more “data dependent” at future meetings amid a murky economic outlook. It looks at the personal consumption expenditure index for inflation clues: The next reading is on Friday.
• Bob Miller, BlackRock’s head of Americas fundamental fixed income, said the Fed will look for falling inflation and reduced labor-market imbalances so it can shift back to its typical quarter-point moves. If that trend doesn’t happen, it could continue with half-point increases or consider a 0.75-point move.
• The minutes didn’t elaborate on plans to begin trimming the $9 trillion balance sheet the Fed built by purchasing Treasury bonds and mortgage-backed securities during the pandemic. They suggested so-called quantitative tightening might be different than after the 2008-09 financial crisis, when assets were allowed to roll off.
• The federal budget deficit will shrink to $1 trillion in 2022 from $2.8 trillion last year, and inflation will take until the end of 2024 to reach the Federal Reserve’s target level, according to new projections from the Congressional Budget Office.

What’s Next: The CBO says inflation could increase by 4% in 2022 and slow after that. It is also predicting higher inflation in 2023 than it did last July, but added that prices could start nearing the Federal Reserve’s goal of 2% inflation by the end of 2024.

—Liz Moyer

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Nvidia’s Weak Outlook Another Disappointment for Tech

Nvidia ’s record sales for the most recent quarter couldn’t make up for a muted sales outlook, as supply-chain disruptions in China and business disruptions in Russia are weighing on results for the current quarter. Shares fell 6% after hours.

• The maker of graphics chips estimated sales in the current quarter around $8.1 billion, which would fall below Wall Street forecasts. It also foresees a sales hit of roughly $500 million relating to Russia and Covid-19 lockdowns in China.
• For just the second time since 2016, sales of chips for big server farms were greater than sales of the chips it sells to videogamers, $3.75 billion versus $3.62 billion. Overall, Nvidia’s $8.29 billion in revenue was a 46% increase from last year.
• Nvidia has tried to make headway in cryptocurrency mining, which has had uneven growth. Revenue from crypto processors was nominal in the recent quarter, compared with $155 million last year. Revenue from automotive chips was $138 million, down 10% from the past year.

What’s Next: Nvidia’s board approved an expansion of the company’s stock repurchase program to $15 billion. In the quarter, the company paid $2.1 billion to shareholders in the form of dividends and share repurchases.

—Liz Moyer

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Real estate is still appreciating while the stock market tumbles. Can a real estate investor still do a tax-free ‘Section 1031 exchange’ for a greatly appreciated real property investment?

If you’re a serious real estate investor, you probably know about tax-deferred Section 1031 exchanges, also known as like-kind exchanges. They allow you to swap appreciated real property for other real property without paying any federal income tax.

While real estate values are still surging in many areas, you may hold appreciated property that you think has topped out and are now looking at what you think are greener pastures. But an outright sale of appreciated property would result in a current income tax hit—maybe a big one. That is a suboptimal outcome if you intend to use the sales proceeds to buy replacement property.

What to do? Section 1031 exchange to the rescue.

Read more here.

—Bill Bischoff

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—Newsletter edited by Liz Moyer, Camilla Imperiali, Rupert Steiner