MONDAY – May 19, 2025

Dear Valued Clients and Friends –

There is a lot of ground to cover today, and so I will leave you in suspense and not blow everything with an introductory paragraph that gives away the conclusion.

Dividend Cafe looked at the investment success of Warren Buffett over 70+ adult years of investing and 94 years on planet earth (and counting) and considered five factors behind the success (some of which are not consensus views). The written version is here (my favorite), the video is here, and the podcast is here.

Off we go …

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Market Action

Markets opened at the low of the day (down over 300 points) and steadily climbed higher throughout the day.
The Dow closed up +137 points (+0.32%), with the S&P 500 up nine basis points and the Nasdaq dead flat.

*CNBC, DJIA, May 19, 2025

The media would have you believe the story of the day was the Moody’s downgrade of U.S. debt, but I am not convinced that is true. The Aa1 rating (one notch below AAA) was basically the same that Standard & Poor’s and Fitch already had, and of course, there isn’t anything in the downgrade rationale that has not been brutally and painfully obvious to everyone with a pulse for over a decade. I am sure there is some symbolic significance in the downgrade for someone, somewhere, but no, it is not some revelatory announcement, whatsoever.
The ten-year bond yield closed today at 4.45%, up just one basis point on the day (after hitting 4.56% at one point). Moody’s can take comfort in the fact that markets responded to their warning for almost thirty minutes!
Top-performing sector for the day: Health Care (+0.96%)
Bottom-performing sector for the day: Energy (-1.55%)
Wal-Mart announced last week that they saw little choice but passing along the impact of tariffs to consumers. President Trump tweeted that they should not do that, and “he would be watching them.” Wal-Mart has an average margin of 2.9% on goods sold. The period between the two and the nine is not a typo.
Japan ships $40 billion of automobiles to the United States per year (1.5 million cars), 30% of its total exports!! You may have heard that Americans like their automobiles. The tariff Japan charges on U.S. auto imports is 0%, but you may have heard they don’t much care for our autos. How a deal gets worked out here, I am not sure. My sources tell me this deal was thought to be one of the easier ones, and is becoming one of the harder ones.

Public Policy

Late Sunday night the conservative hardliners (I hate that term) did allow the House budget bill out of committee (they had blocked it as of Friday), but that is a far cry from getting the full House vote needed, and getting the Senate vote, and getting the Senate version to be one the House will accept after revisions.
There has not been a lot announced on what has been modified in the bill from Friday to get those who were holding it up in committee to agree, but the general understanding I have is that the “minor modifications” include a more imminent enforcement of work requirements for Medicaid and more aggressive removal of clean energy tax credits.
The latest draft includes a $40,000 SALT deduction cap (vs. the $30,000 proposed in last week’s bill), but with a $200,000 income limit that really is moot. Speaker Johnson is meeting with the SALT caucus at 9:00 pm tonight.
The next step is the Rules Panel hearing set for … wait for it … 1:00 am on Wednesday morning (with a floor vote on the House desired for Thursday)
My own view continues to be that the story here has changed, whereby the focus in the public is now on whether or not the politics will end up accruing to the President’s favor (that is, will he get the cosmetic win of a bill passing), and yet the focus of markets will be on the bill, itself. In other words, no matter how much dancing takes place between now and then, I think they are getting a bill – I just think it is proving to be a much less consequential one than previously believed.

Economic Front

The Producer Price Index (PPI) declined by -0.5% in April, bringing the year-over-year PPI to just +2.4%. Energy and Food wholesale prices were down but the Core PPI was also down -4% in April. Goods prices are up +0.5% year-over-year, with Services up +3.3% year-over-year.
Freight shipments from China were up +275% this week versus the week prior in the aftermath of the Trump reversal on tariffs with China.
Retail sales rose +0.1% in April and are up +5.2% vs. a year ago.
Japan’s economy contracted 0.2% last quarter, more than expected, which is not helping Japan much in terms of leverage regarding the trade discussions with the Trump administration.

Housing & Mortgage

The NAHB Sentiment Index for May was abysmal, dropping six more points (to 34). This was the weakest it has been since late 2022 and reflects very poor Present Situation read and very weak Prospective Buyers Traffic. The tariff issues around lumber, steel, and aluminum have created huge issues for builders (78% saying it has created difficulties pricing homes).
Housing starts rose 1.6% in April to a 1.36 million annualized rate, below the consensus expectation, and down -1.7% from the low level of last year’s starts. Single-family starts are actually down -12% over the last year, as all net new housing starts are in the multi-family category.

Federal Reserve

We are sitting at a 92% probability of no change in the Fed Funds rate at the June meeting now, so yes, those praying for a rate cut, 8% odds are “saying there’s a chance.”
What is a bigger change is that we are only at 35% implied probability of a rate cut in July, now, as the Presidential reversal on tariff threats reduced the odds of the economic distress the market was pricing in as a catalyst to a cut.
And along those lines, we are now sitting at a 23% chance of just one cut by the end of the year, a 38% chance of two cuts, a 26% chance of three cuts, and only 7% of four cuts (with some minimal odds around the edges to round out).

Oil and Energy

WTI Crude closed at $62.10, up a tiny bit.
Midstream energy stocks were up +2.5% last week, refiner stocks (downstream) were up HUGE, and upstream was somewhere in the middle. Crude itself was up about +2.5%. All aspects of the energy story were taking in the China tariff suspension early in the week and improved economic outlook from there.
MLPs particularly shone last week (up around 4-5%) but had lagged the week prior.

Ask TBG

“Thanks for writing this week about Warren Buffett. Your missive was not what I expected but excellent in a very different way and insightful as always. My questions are: (1) Why have so many tried to emulate the portfolio management style of Buffett and Munger but so few followed Berkshire’s actual business model? (2) Is there any credence to Berkshire using leverage from owning insurance and reinsurance balance sheet assets? And (3) They own dividend and growing dividend equities but do not pay a dividend … Help me understand?”
~ Fred H.

I think the current effort of Ackman with Hughes is a good example of how some do see the general appeal of the Berkshire model. Getting permanent capital, a Holdco with that regulatory apparatus, and the permanent capital and recurring cash flows of that insurance model, is not exactly easy to replicate. I also suspect some have tried versions of the structure that we have never really seen because the execution failed before we would have been privy.
I think there is category confusion here. They certainly cannot (and have not) “borrowed” from the balance sheets of insurance companies to buy assets for the Berkshire balance sheet. But perhaps what you are referring to is the embedded recurring cash flows the insurance models provide that provide benefit (and permanent opportunity flow) to the hold co? But that is the essence of the model itself, and I think a misnomer to label it “leverage.”
It is functionally (for owners) a fund where dividends are set to “reinvest” … The hold co receives dividends – the dividends grow – but it is not a mutual fund, and their entire business model is based on finding other business opportunities. Their universe for investible opportunities is infinite and as #1 and #2 above refer to the model is based on reinvestment of recurring cash flows (one summary I heard years ago was they go short fear (i.e. receive insurance premiums), and use those premiums to go long America (i.e buying railroads and blue chips and industrials and energy and so forth and so on). But the dividend reality and dividend growth reality, while not inherently the same as my investment philosophy, is indeed embedded within many of the companies of the hold co – but why the hold co does not pay it out speaks to the entire essence of what the hold co is. I think people wondering about this view Berkshire Hathaway as a mutual fund or “active stock portfolio,” which is simply not accurate.

On Deck

All eyes are on the tax bill, with the FOMC meeting behind us and earnings season behind us.

Reach out with any questions, as always!

With regards,

David L. Bahnsen
Chief Investment Officer, Managing Partner

The Bahnsen Group
www.thebahnsengroup.com

The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.

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May 19, 2025

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About the Author

David L. Bahnsen

FOUNDER, MANAGING PARTNER, AND CHIEF INVESTMENT OFFICER

He is a frequent guest on CNBC, Bloomberg, Fox News, and Fox Business, and is a regular contributor to National Review. David is a founding Trustee for Pacifica Christian High School of Orange County and serves on the Board of Directors for the Acton Institute.

He is the author of several best-selling books including Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (2018), The Case for Dividend Growth: Investing in a Post-Crisis World (2019), and There’s No Free Lunch: 250 Economic Truths (2021). His newest book, Full-Time: Work and the Meaning of Life, was released in February 2024.

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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