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Biden has options beyond a corporate tax hike to pay for infrastructure, as negotiations get underway

As Biden tries to curry favor for a corporate tax hike, the administration has other ways it could fund a $2 trillion infrastructure plan.

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Wind turbines and power transmission lines at a wind farm near Highway 12 in Rio Vista, California, on Tuesday, March 30, 2021.

David Paul Morris | Bloomberg | Getty Images

As President Joe Biden attempts to curry favor for his proposed corporate tax hike, the administration still has other ways it could try to fund and finance its $2 trillion infrastructure legislation.

Biden could decide, for example, to return to a campaign promise to ask the country’s wealthiest households to contribute more in personal income taxes or lobby to increase the federal gasoline tax.

Other funding ideas include a so-called mileage tax and better monetization of the U.S. electrical grid. Democrats may ultimately lean on a special class of bonds to finance their spending plans despite objections from the GOP and concerns about the growing national debt.

While both parties agree that the U.S. is in dire need of infrastructure repair, the GOP has thus far opposed the Biden plan for funding too many projects beyond what they consider critical infrastructure.

Senate Minority Leader Mitch McConnell, R-Ky., has dubbed the American Jobs Plan a “Trojan horse” for liberal policies, while others have balked at the hundreds of billions of dollars earmarked for items other than improvements to roads, bridges, airports and public transit.

Those agenda items, coupled with the administration’s $1.9 trillion Covid-19 relief package signed in March, have convinced Republicans and some moderate Democrats that the White House should seek ways to pay for the plan upfront with new taxes.

Partially to quell funding concerns, Biden has offered a “Made In America” tax plan that includes hiking the corporate tax rate to 28% and removing incentives for corporations to send factories and profits offshore. Treasury Secretary Janet Yellen announced Wednesday that the tax plan would generate about $2.5 trillion over 15 years.

That proposal, however, amounts to a partial rollback of former President Donald Trump’s 2017 tax cuts and is already opposed by Republicans and Democratic Sen. Joe Manchin of West Virginia.

Those concerned about a corporate tax hike say increasing the rate could hinder a fragile economic recovery and make the U.S. a less attractive place for businesses to build factories and hire workers.

Biden, in a speech addressing infrastructure Wednesday, rejected those concerns but said he was open to negotiating on the corporate tax rate. He will meet with Republican and Democratic lawmakers on Monday to kick off infrastructure negotiations in earnest.

“We’ve got to pay for this,” Biden said Wednesday, noting that there are “many other ways we can do it.”

Debt financing

To Tony Fratto, opposition to an infrastructure plan based on cost concerns doesn’t make much sense.

Infrastructure “generates an economic return, and so why exactly are we constraining ourselves with the concept of putting pain on certain segments of the economy?” Fratto, a Treasury official in the George W. Bush administration, said Friday.

With U.S. interest rates still historically low, Fratto argued that it would not take long for the economic benefits generated by faster, more efficient transit to pay for the government’s initial spending.

“You can make a very strong case to borrow the money and pay it back over time on the expected returns,” he added. “We have failed to invest in all of the infrastructure needs that this country has by this fictional argument that it must be paid for for us to do it.”

A study published by the Wharton School this week found that Biden’s infrastructure plan would actually reduce U.S. debt by 6.4% in 2050 relative to current law.

If lawmakers ultimately develop an appetite for debt, the White House could try to resurrect a class of special municipal bonds known as Build America Bonds that allow states and counties to float debt with interest costs subsidized by the federal government.

Income tax

A possible alternative to a corporate tax hike would be adjustments to individual income taxes, as Biden proposed during his 2020 campaign.

Then-candidate Biden proposed raising the top individual income tax rate to 39.6% from its current level of 37%. He also called for the capital gains rate to rise to 39.6% for taxpayers with income over $1 million. Currently, wealthy investors face long-term capital gains rates of up to 20%.

Despite demanding during the campaign that the wealthiest Americans pay more as a percentage of their income, Biden has yet to say when he plans to increase income tax rates.

However, the president doubled down on a red line in his speech Wednesday.

“I will not impose any tax increases on people making less than $400,000 a year,” Biden said. “If others have ideas out there on how to pay for this investment without violating that rule, they should come forward. There’s all kinds of opportunities.”

Gas tax

Another possible revenue generator could be an increase in the federal government’s gas tax. That tax was last raised in late 1993 and is not indexed to inflation, meaning that its effective value has eroded over the last 27-plus years.

The federal government currently collects 18.4 cents per gallon of gasoline sold in the U.S. and 24.4 cents per gallon of diesel fuel. That revenue, which totaled $36.4 billion in fiscal 2016, is used by the Federal Highway Trust Fund, which funds road construction and other surface transportation projects.

Transportation Secretary Pete Buttigieg told CNBC last month that the gasoline tax may soon be an outdated mechanism to raise significant revenue as more Americans switch to electric vehicles and fuel-efficient cars.

Republican Sen. Roy Blunt of Missouri, a supporter of a far-smaller infrastructure bill, told “Fox News Sunday” that funding for repairs to the nation’s roads and bridges needs to evolve over time.

“As we have more electric vehicles, we’re going to have to figure out some way that those electric vehicles pay their fair share,” he said Sunday. “We may even have to figure out a different way that driverless vehicles pay for the increased kind of monitoring that needs to happen with the highway system itself you have with that.”

States, too, have for years imposed their own taxes on the sale of gasoline.

In 2019, the Republican governors of Ohio, Alabama and Arkansas signed fuel tax hikes in an effort to help fund road repair, and in 2018, Michigan’s Democratic governor, Gretchen Whitmer, won election after campaigning on the slogan “Fix the Damn Roads.”

However, several Republican senators opposed increasing the gas tax when former President Donald Trump sought to make a push on infrastructure.

As of Jan. 1, total state taxes and fees on gasoline averaged 30.06 cents per gallon, according to the U.S. Energy Information Administration.

Mileage tax

Buttigieg said a mileage tax could be a more attractive option than a gas tax for lawmakers who support the idea that consumers should pay for infrastructure based on how often they use it.

“I’m hearing a lot of appetite to make sure that there are sustainable funding streams,” the Transportation secretary said in March. A mileage tax “shows a lot of promise if we believe in that so-called user-pays principle: The idea that part of how we pay for roads is you pay based on how much you drive.”

The mileage tax is a relatively new idea, and so there are a few barriers to it becoming a reality in the near term. Questions remain over how to record the distances individuals travel, how and where fees would be collected, and whether the introduction of such a tax would disproportionately impact low-income or rural communities that rely on cars to get to work.

Still, a vehicle miles tax, or VMT, does enjoy bipartisan support on the key House Transportation and Infrastructure committee. Both Chairman Peter DeFazio, D-Ore., and Ranking Member Sam Graves, R-Mo., have voiced support for VMT measures in the past.

“It’s become abundantly clear that we need to move on from the gas tax and diesel tax as the primary means of building infrastructure,” Graves wrote in March. “Although critics will say that we’re not ready for VMT, we’ve heard that same argument for too long. The Highway Trust Fund continues to lose more and more revenue because not all users are paying their fair share given increased fuel efficiency and electric vehicle technology.”

Monetizing the electrical grid

Fratto suggested the federal government could look to tax Americans’ electricity consumption as a greater percentage of the U.S. population switches to electric vehicles.

That could take the form of at-home grid use or fees levied at charging stations akin to a gas tax for petroleum-powered cars. That may be an appealing option in the future, Fratto said, since utility companies have already established and installed ways to keep track of and charge for the energy consumed by each household.

“There are lots of other user fees that we have across all these systems that we could use, including the electricity sector,” the former Treasury official said. “We can take some fee off the use of the grid in order to pay back the federal government for its investment in those areas.”

“You could easily attach a fee that power companies would have to pay, and the same goes for the availability of electricity,” he added.

Smaller corporate tax hike

Ultimately, how Biden finances his plan and the degree to which he relies on a corporate tax hike will depend on how much he wants bipartisan support from a Republican Party that is calling for him to scale back his ambitions and focus on a package closer to $600 billion.

The president and the Democratic leadership in Congress could opt to use the reconciliation process, as they did for the Covid relief bill, which would allow them to pass the legislation with a simple majority in the evenly divided Senate.

In that case, Biden could bypass Republican objections and he would play largely to an audience of one in the Senate — Sen. Joe Manchin.

Though the conservative West Virginia Democrat opposes raising the corporate rate to 28%, he might be willing to meet Biden in the middle.

“As the bill exists today, it needs to be changed,” Manchin told Hoppy Kercheval, the host of West Virginia Metro News’ “Talkline” show. “I think [the corporate rate] should have never been under 25%, that’s the worldwide average. And that’s what basically every corporation would have told you was fair.”

Source: https://www.cnbc.com/2021/04/09/biden-has-options-beyond-a-corporate-tax-hike-to-pay-for-infrastructure.html

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The stock market may be misreading what this weak jobs report means for the Fed

The disappointing April jobs report reinforces the Fed’s easy policies, but some strategists still expect the Fed to move toward ending bond purchases.

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A help wanted sign is posted at a taco stand in Solana Beach, California.

Mike Blake | Reuters

The much weaker than expected April jobs report reinforces the Federal Reserve’s easy policy stance, but some strategists still expect the central bank to signal in the next couple of months that it will slow down its bond buying.

Economists had expected to see 1 million new jobs last month, so the government’s report of just 266,000 was a gut punch to the view that the economy is rebounding in a smooth upward trajectory. The anticipation for a big jobs number also had put the spotlight on the Fed’s easing programs.

Stock futures rose and Treasury yields immediately fell after the report. But the 10-year Treasury yield, after falling to about 1.49% turned around to trade at 1.55%. The 5-year also fell but stayed near its low. Yields move opposite bond prices. In afternoon trading, stocks remained higher with the Dow up about 160 points.

“I’m wondering if bonds are selling off a little as it just reinforces [Fed Chair Jerome] Powell wanting to be patient,” said John Briggs, head of global strategy at NatWest Markets. “But if you’re like me, waiting for the Fed to taper, I think the Fed is going to start talking about it in September. That means the market is going to be talking about it in the summer.”

Economists said the May jobs report will provide more information on the state of hiring, which could have been slowed by bottlenecks showing up in supply chains. For instance, auto workers have been idled due to the shortage of semiconductors needed to build automobiles. There is also an acute shortage of workers in some areas and industries. Economists also see closed schools as an issue, keeping parents from the workforce. To some extent, expanded unemployment benefits may also be a factor.

“If one is thinking about the evident labor shortages being inflationary, that should push the 5-year yield up,” said Michael Schumacher, Wells Fargo rates director. “But the other side is if you consider the chance of the Fed tapering, that’s been pushed back slightly. Not much in my opinion, but people might take that view.”

Schumacher said he still expects the Fed to discuss trimming its purchases of about $120 billion a month in Treasurys and mortgage securities.

Fed Chairman Jerome Powell has knocked the idea that the Fed will begin discussing an unwind any time soon. But some strategists still expect the Fed to be forced into slowing the purchases and ultimately ending them due to the strength of the economic recovery and the specter of inflation.

A step toward ending the bond-buying program would ultimately be a step toward raising interest rates, which the Fed is not expected to do any time soon. Powell has said the Fed would complete the slow wind down of its bond purchases before raising interest rates.

“If you’re an economy bull, you say this is probably an aberration. … The bears can say you’re losing momentum. Either are possible until you get another month,” Briggs said, noting the next report could show a large amount of hiring. “When was the last time you reopened an economy in a pandemic? Where are your seasonal factors for that?”

He said the bond market is also reacting to the potential for more fiscal stimulus, highlighted by the White House after the weak number.

“It’s as simple as this — a drop in rates, let’s buy tech,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “The stock market can’t decide whether it wants to celebrate the drop in yields and maybe a Fed that’s not going to taper so quickly but at the same time, we’re early stage in the recovery but we’re seeing a lot of late stage behavior like supply demand getting hot … this overheating.”

Jan Hatzius, chief economist at Goldman Sachs, said the bond market reversal appears to have come as traders looked at the inconsistencies and decided the number was distorted. “That was my view as well,” he said on CNBC. Hatzius said the weak jobs report does not change his view that the Fed will taper its bond purchases starting next year and then raise interest rates in 2024.

“I’m not sure having one dud report changes the calculation too much,” said Schumacher. “I suspect the forecast range will be astronomical next month.”

The unemployment rate rose in April to 6.1% from 6%. The bulk of hiring was in the leisure and hospitality sector, which added 331,000 jobs as pandemic restrictions on restaurants eased.

Average hourly wages rose by 21 cents to $30.17 in April, and economists note that strong hiring of workers in the hospitality industry typically makes overall wage numbers go down.

“This is a devastating disappointment, more than just seasonal problems. We had declines in everything from professional services to manufacturing and even couriers and transportation,” said Diane Swonk, chief economist at Grant Thornton. “Turning on the lights in the economy is harder than turning them off.”

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Source: https://www.cnbc.com/2021/05/07/the-stock-market-may-be-misreading-what-this-jobs-report-means-for-the-fed.html

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Peloton reports sales up 141% as cycle demand remains strong, says it’s working to quickly fix treadmills

Peloton said Thursday it expects its fiscal fourth-quarter sales to take a $165 million hit due to a treadmill recall.

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A monitor displays Peloton Interactive Inc. signage during the company’s initial public offering (IPO) across from the Nasdaq MarketSite in New York, U.S., on Thursday, Sept. 26, 2019.

Michael Nagle | Bloomberg | Getty Images

Peloton said Thursday its fiscal third-quarter sales grew 141%, as recent investments in its supply chain allowed it to improve the pace of deliveries.

However, even as the company made progress in easing delivery bottlenecks — brought on by its popularity as a way to exercise at home during the coronavirus pandemic — it faced another challenge: the need to recall all of its treadmills after one child died and dozens were injured in accidents involving the Tread+ machine.

Peloton shares initially fell after its financial results were released. The report didn’t disclose any details about the impact of the recall, or its outlook.

But the stock swiftly recouped losses after the company provided more details on its earnings call. Peloton shares were recently up more than 4% in extended trading.

The company expects the treadmill recall — which has halted sales of its two models and delayed the planned launch of a less-expensive version in the U.S. — to reduce fourth-quarter sales by $165 million.

It now expects fourth-quarter sales of $915 million, which is lower than the $1.12 billion analysts were expecting, according to Refinitiv estimates.

Peloton also expects to incur added costs because it’s offering customers full refunds and will waive all treadmill customers’ membership fees for three months. This should reduce its fourth-quarter adjusted EBITDA by about $16 million, Peloton said.

“Our goal is to have the best safety features for treadmill products on the market,” Chief Executive John Foley said during the earnings conference call. “There will be a short-term financial impact due to the steps we’re taking.”

Still, demand for its cycles, which represent the majority of its business, remains strong. Peloton said that unit sales of its cycles during the fourth quarter should be more than three times what they were two years prior.

Here’s what the company reported for the quarter ended March 31 compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Loss per share: 3 cents vs. 12 cents expected
  • Revenue: $1.26 billion vs. $1.1 billion expected

Peloton’s net loss shrank to $8.6 million, or 3 cents per share, from a loss of $55.6 million, or 20 cents per share, a year earlier. That was better than the 12 cents-per-share loss that analysts were anticipating.

Total revenue surged 141% to $1.26 billion from $524.6 million a year earlier and topped a Wall Street forecast for $1.1 billion.

Connected fitness revenue rose 140% to $1.02 billion, representing 81% of its total sales. Subscription revenue grew 144% from 2020 levels to $239.4 million and makes up 19% of total revenue, the company said.

Sales were driven, in part, by an acceleration of expected deliveries, Peloton said. Last quarter, it announced plans to invest $100 million in air freight and expedited ocean freight over a six-month period to help speed shipments. It also recently completed its $420 million acquisition of the manufacturer Precor, in a bid to boost its production capabilities in the United States.

The company said average wait times for its Bike are now back to pre-pandemic levels.

“While progress has been made, additional work remains to reduce delivery times across the remainder of our product portfolio and regions,” Foley said in a letter to shareholders.

Churn hits record low

Peloton ended the quarter with 2.08 million connected fitness subscriptions, up 135% from a year earlier. Connected fitness subscribers are people who own a Peloton product and also pay a monthly fee for access to the company’s digital workout content.

Average net monthly connected fitness churn, which Peloton uses to measure retention of connected fitness subscribers, hit a six-year low of 0.31%. The lower the churn rate, the less turnover Peloton is seeing with its user base.

Total workouts, which include those from connected fitness users and from digital-only customers, grew to more than 171 million from 48 million a year earlier.

The company has been adding new content, such as barre and Pilates classes, to keep its customers engaged. It’s also preparing to launch in Australia later this year, as it continues pushing into new markets.

Working to approve new design

On Wednesday, Foley apologized for initially rebuffing the U.S. Consumer Product Safety Commission’s recommendation that the treadmills be recalled. In a statement, he said he should have acted more quickly to resolve the issue when the safety concerns were raised.

Peloton originally opposed a recall, saying customers should use its machines when children and pets are not present, and lock the machines when they’re not in use.

The CPSC must approve new enhancements to its treadmills that will make the equipment safer before it can be sold again, Foley said Thursday. He added that he anticipates the Tread to go on sale again “much sooner” than the Tread+.

“This process typically takes six to eight weeks. It could take longer. So we can’t offer an on-sale or revised launch date at this time,” Foley said.

Peloton’s Tread+ machine has an unusual belt design that uses individual rigid rubberized slats or treads that are interlocked and ride on a rail. Many other treadmills on the market have a thinner, continuous belt. There is also a large gap between the floor and the belt of the Tread+, which leaves a space beneath it that can pose a risk.

In April, the CPSC released a graphic video that showed a young boy being pulled under one of the Tread+ machines and struggling to free himself. It was captured on a home security camera.

With the Tread, some users have reported their screens coming unscrewed and falling off.

“We know that millions and millions of Americans use treadmills safely in homes today, so we remain incredibly bullish about the opportunity,” Foley said Thursday. “In order to run at home, you need a treadmill.”

Peloton shares are down 45% year to date, as of Thursday’s market close. It has a market cap of $24 billion.

Check here for the earnings release from Peloton.

Peloton shares initially fell after its financial results were released. The report didn’t disclose any details about the impact of the recall, or its outlook.

Source: https://www.cnbc.com/2021/05/06/peloton-pton-q3-2021-earnings.html

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Berkshire Hathaway’s annual meeting is here: What to expect from Warren Buffett and Charlie Munger

The 90-year-old Buffett is taking the “Woodstock for Capitalists” to Los Angeles, marking the first time the annual meeting will take place outside of Omaha.

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Warren Buffett (L), CEO of Berkshire Hathaway, and Vice Chairman Charlie Munger attend the 2019 annual shareholders meeting in Omaha, Nebraska, May 3, 2019.

Johannes Eisele | AFP | Getty Images

Warren Buffett will kick off Berkshire Hathaway‘s annual shareholder meeting on Saturday riding high, with shares of the conglomerate at a record and its myriad of operating businesses and equity investments primed to benefit from the U.S. economy reopening from the pandemic.

The event will be held virtually (1:30 pm ET) without attendees for a second time because of Covid-19. This year, however, the 90-year-old Buffett is taking the meeting to Los Angeles so he can be by 97-year-old Berkshire Vice Chairman Charlie Munger’s side once again. Munger resides in Los Angeles and missed the last annual meeting due to travel restrictions. It will be the first time that the annual meeting will take place outside of Omaha, Nebraska.

While “Woodstock for Capitalists” will be missing the capitalists once again, the tone of the meeting may more likely resemble the meetings of old with shareholders clamoring for Buffett’s outlook on the world following an unprecedented year.

“I hope there would be a pretty sharp contrast in the overall demeanor of the folks at Berkshire,” said Cathy Seifert, a Berkshire analyst at CFRA Research. “Last year, there was a degree of an alarm just because this was an event that was very difficult to price. It was kind of written all over his face. This annual meeting, the tone from an underlying operational perspective should be more relaxed.”

(You can view last year’s annual meeting and the others at the Warren Buffett Archive.)

Berkshire’s other vice chairmen, Ajit Jain and Greg Abel, will also be on hand to answer questions during the 3½-hour event. Berkshire’s B shares were up more than 1% on the week, bringing their 12-month gain to 50%.

Here are some of the big topics shareholders will want answers on:

  • Airlines: His thoughts on the industry after revealing at last year’s meeting he sold his entire stake (with the shares then subsequently roaring back)
  • Deploying the $138 billion cash pile: Why he’s been buying back a record amount of Berkshire’s stock instead of making one large acquisition and what his plan is going forward
  • Market outlook: His thoughts on the stock market’s overall valuation following the pandemic comeback
  • Bubbles?: Cryptocurrencies and the other possible market manias that have popped up amid the huge rush of retail investors into markets
  • Life after Buffett and Munger: Berkshire’s succession plan

Dumped airlines

At the last annual meeting, Buffett revealed Berkshire sold the entirety of its equity position in the U.S. airline industry. This included stakes in United, American, Southwest and Delta Air Lines, which were worth north of $4 billion combined.

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” Buffett said at the time. “I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”

The sale conveyed a pessimistic view on the industry from the legendary buy-and-hold investor. Many Buffett watchers were left disappointed, however, as shares of those carriers soon embarked on an epic rebound, rallying triple digits from 2020 lows. Even former President Donald Trump weighed in on the trade back then, saying that Buffett has been right “his whole life” but made a mistake selling airlines.

“He might acknowledge that the velocity of this recovery was greater than anticipated,” CFRA’s Seifert said. “The airline disposal may have been a function of their belief that what’s going on in the airline industry may be secular and not cyclical. That’s the one fine distinction that investors may want him to make.”

While airline stocks have rebounded drastically over the past year, many argue that the industry may have indeed changed fundamentally due to the economic fallout and the road to a full recovery remains bumpy. United Airlines said this month that business and international travel recovery is still far off even as the economy continues to reopen.

“He may still be right about the airline industry with travel coming back slowly and there being too many planes,” Edward Jones analyst James Shanahan said. “Arguably he could still be right about that, but he’s certainly wrong on the stocks.”

New stock moves

Berkshire bought back a record of $24.7 billion in its own shares last year. Buffett also did some bargain-hunting amid the market comeback, taking sizable positions in big dividend payers Chevron and Verizon.

Apple was still the conglomerate’s biggest common stock investment as of the end of 2020. Buffett’s conglomerate also appeared to dial back its exposure to financials. Berkshire exited its JPMorgan Chase and PNC Financial positions at the end of last year, while cutting the Wells Fargo stake was cut by nearly 60%.

“When you think about the legacy of Berkshire Hathaway and all the operating businesses, including railroads, manufacturing, retail, utilities, it’s all old economy type companies,” Shanahan said. “The way the portfolio is comprised now after the selling of airline stocks and selling of the financial stocks, together with huge performance in Apple, it looks a lot more new economy now.”

Shanahan estimated that Berkshire bought back another $5 billion of its own shares in the first quarter, based on proxy filings.

‘Elephant-sized’ deal?

The conglomerate was still sitting on a huge cash war chest with more than $138 billion at the end of 2020. Buffett has yet to make the “elephant-sized acquisition” he’s been touting for years. At last year’s meeting, the legendary investor gave a simple reason for his inaction.

“We have not done anything because we haven’t seen anything that attractive,” Buffett said. “We are not doing anything big, obviously. We are willing to do something very big. I mean you could come to me on Monday morning with something that involved $30, or $40 billion or $50 billion. And if we really like what we are seeing, we would do it.”

The deal-making environment has only become all the more competitive over the past year with the meteoric rise of SPACs, or special purpose acquisition companies. More than 500 blank-check deals with over $138 billion funds are seeking their target companies currently, according to SPAC Research.

“This is a significant company with a significant cash position. Investors have the right to know what they intend to deploy the cash,” Seifert said. “They are entitled to have more than just an excuse. Investors are going to start to grow a bit weary if it’s just the same old story. But the stock has recovered nicely, so they are not going to be grumbling too much.”

Succession

When it comes to a concrete succession plan, shareholders might not get much more from Buffett and Munger even though they are now both nonagenarians.

Abel, vice chairman of noninsurance operations at Berkshire, is seen as a top contender as Buffett’s successor.

“I do not expect him to talk about succession in any more detail than he already had,” Shanahan said. “Elevating the status of Abel and Jain to the roles of vice chairmen and having them available and participating in annual meeting speaks volume. I don’t think he necessarily has to say more than that.”

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Source: https://www.cnbc.com/2021/04/30/berkshires-annual-meeting-is-saturday-with-buffett-and-munger-together-again-shares-at-a-record.html

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