Stocks soared to start the week.
When the day was out, each of the major U.S. indexes rose more than 1% with the Dow gaining 399 points, or 1.6%, to lead the way.
Shares of Berkshire Hathaway (BRK-A, BRK-B) were among the notable gainers on the S&P 500, with the company’s B shares rising nearly 4% after Warren Buffett’s latest letter to Berkshire shareholders released Saturday showed the company had a $29 billion gain related to the Trump tax cuts passed late last year. Treasury yields, a recent source of tension for the stock market, were slightly lower on the day with the 10-year settling near 2.86% have moved as low as 2.84% earlier in the day.
On Tuesday, the schedule will be busy with durable goods orders, readings on home prices from S&P/Case-Shiller as well as the Federal House Finance Authority, and The Conference Board’s consumer confidence reading for February all expected for release in the morning.
The Conference Board’s data will be closely track for any signs that the stock market sell-off dented confidence in the U.S. economy among consumers; data from the University of Michigan earlier this month indicated that the benefits of tax cuts are outweighing any concerns about volatility in financial markets.
Tuesday will also be a big day for Fed watchers as new Federal Reserve chair Jerome Powell will be on Capitol Hill delivering his first semiannual testimony before lawmakers at 10 a.m. ET. And then at 2:00 p.m. ET, former Fed chairs Ben Bernanke and Janet Yellen will be in discussion at the Brookings Institution, Yellen’s first public appearance since leaving her post at the top of the central bank earlier this month.
Buffett’s business assumptions
Warren Buffett published his latest annual letter to Berkshire Hathaway shareholders on Saturday. On Monday morning, Buffett talked to CNBC for three hours about this and other things.
And amid a flurry of headlines about tax reform being a “tailwind” for Berkshire, his not ruling purchasing an airline, and Buffett’s love for Apple’s business, the Oracle of Omaha also gave some typically-incisive commentary on how he evaluates the competitive landscape for businesses he would like to buy or invest in.
Recently, Buffett has been paring his stake in IBM (IBM), which has mostly gone down since Buffett first bought shares in 2011. When he revealed the stake initially, Buffett talked about the competitive advantages IBM had since most companies used their hardware to build their internal networks and were unlikely to change.
Then the cloud came along. And the winner wasn’t IBM or any of the companies one might’ve expected them to compete with for a new enterprise computing market — Oracle (ORCL) or Cisco (CSCO) or Hewlett-Packard (HPQ), for example — but Amazon (AMZN).
Buffett said that Amazon’s Web Services business, which has become the retailer’s main profit center and a leader in the industry, is “one of the most extraordinary things I’ve ever seen in business.”
In other words, Buffett thinks he could have reasonably expected IBM to slip on being a cloud leader to an expected competitor like the aforementioned companies. And when you fall behind a key rival, your path to recovering is at least somewhat comprehensible to investors. The company can replace management, buy a competitor, break up the company, etc. The MBA checklist, more or less, is intact.
But when your industry faces a paradigm shift and the new leader is a company you didn’t think about at all— like Amazon entering the cloud computing space— investor and executive expectations are unmoored. Perhaps an IBM struggling against HP would’ve made the company’s challenges more clear for Buffett, and perhaps he would’ve sold the stock earlier. But against Amazon, the company’s predicament was a surprise and somewhat incomprehensible.
With Amazon Web Services, Buffett said Jeff Bezos was “revolutionizing the industry, and other people sat on their hands, basically.” Including Buffett himself.
And in this example, we get some great insight into how Buffett understands the moats that companies he buys or invests in have. Having an advantage over your known competitors — a better service, better hardware, sticky customer-base — is what you build into judging whether an investment is good or bad.
The unknown unknown, then — Amazon entering Web Services, or perhaps Apple entering cellular phones — is what happens when entirely new industries spawn from what you had believed was a certain set of business expectations.
And it’s how even the best investment processes yield poor outcomes.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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