Bacon Demand Is Up And Pig Counts Are Down, Plus Warren Buffett Buys Energy Future For $9 Billion

By 07.10.17

morning brew

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“I do believe this market cap is higher than we have any right to deserve.”

Elon Musk commenting in May on Tesla becoming the most valuable automaker by market cap. Looks like he was onto something.

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Market Snapshot

Market icon U.S. indexes finished higher on a strong June employment report.
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Market icon Oil finished the week lower for the sixth time in seven weeks.
Market icon 10-year treasury yields hit their highest level since May 11th.

Can I Get an Oncor

Warren Buffett is wrapping his hands around Oncor’s $431 million (profit) electricity business.

To do so, he’s buying Energy Future—Oncor’s parent company—for $9 billion.

Energy Future has a dark past

Back in 2007, TPG, KKR and Goldman Sachs paid $45 billion for Texas’ largest electricity company (in the biggest leveraged buyout ever).

Then this little thing called fracking happened.

Despite 122,000 miles of electricity distribution and 11.6 million customers, little could be done to endure the sharp rise in natural gas supply and sharp fall in profit margins.

Very quickly, Energy Future was once again…considering its future.

In rides Buffett with a coke in hand

Texas regulators have cracked the whip on Energy Future’s potential suitors (NextEra and Hunt Consolidated), leaving it hovering in bankruptcy limbo since 2014.

But, Berkshire’s deal offers exactly what the doctor ordered: a strong balance sheet with $96 billion in cash.

So, why is Buffett buying?

For the old-school value investor, this deal checks all the boxes.

Undervalued: Energy Future’s enterprise value is estimated to be $18 billion. Berkshire is paying half of that—check.

Reliable: The utility business is tediously predictable, producing long-term stable returns—check.

Strong Leadership: Greg Abel (future Buffett successor?) has been the lifeblood of Berkshire’s energy arm since day one—check.

And here’s the icing on the cake:

Buffett lost $873 million (pre-tax) on Energy Future bonds in 2013, so for him, this deal is personal.

But activist investor Paul Singer may want in on the action

The ship-seizing, CEO-bullying, government-suing hedge fund hotshot also has history with Energy Future.

Singer has notoriously gotten his way through any means necessary and he just so happens to own $2.9 billion in Energy Future debt.

For now, Singer’s fund, Elliott Management, has yet to submit a counterbid, but if they decide to enter the ring, this baby could go a full ten rounds.

Would you prefer a longer, in-depth story like this to start off the brew and then three shorter stories or just four shorter stories?

a) 1 Longer, 3 Shorter
b) 4 Shorter

Email us with any additional thoughts!

Grade A Report

The U.S. government came bearing good news Friday morning with its monthly employment report.

In June, the eighth anniversary of the Great Recession’s end, the economy added 222,000 jobs, the largest increase since February of this year. Mix in a little-changed unemployment rate at 4.4% and you’ve got yourself a winning recipe for a healthy job market. Sound too good to be true?

That’s because it is. Say hi to slow wage growth. Workers’ average hourly earnings only rose 0.2% this month, mystifying economists and investors.

The reason? Wage growth is typically sticky, but only in the short term. So, after years of strong job growth, wages should be gaining some momentum.

BACONNNNNNNN

Bacon demand is up and pig counts are down.

Summer is the time of year to get that bacon sizzlin’, but recent BLT frenzies have driven pork stock piles to their lowest point since 1957—and it’s showing.

Wholesalers are feeling the 71% upswing in prices, while grocers are forking over 21% more per pound.

Why the gap? Believe it or not, most retailers don’t want to scare customers away with rising prices. So, if they have to eat some of the cost for you to eat more bacon it just might be worth it.

But, there is one tactic to hedge against this pork squeeze: lock in contract rates with Hog Futures.

Yup, that’s a real thing.

Tell Me More…

  • Sears Holdings (-1.89%) will close eight Sears stores and 35 Kmarts.
  • Spider Man raked in $117 million in its box office opening weekend.
  • Private equity firm Apollo is purchasing golf course operator ClubCorp for $1.1 billion.
  • Tesla (+1.42%) was selected to build the world’s largest lithium-ion battery in Australia.
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Economic Calendar

Monday No events today
Tuesday Earnings: PepsiCo, Yum!
Wednesday No events today
Thursday Earnings: Delta
Friday Earnings: Citigroup, Wells Fargo
+ EPS > ESTIMATE
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From the Crew

From MichaelBook of Mormon

After five years of anticipation, I finally saw the Book of Mormon on Broadway—it was everything I dreamed of and more. Matt Stone and Trey Parker spin 150 minutes of pure satirical genius into one of the most entertainingly hilarious shows I’ve ever seen.

Hello, my name is Elder Price

From AustinBudget Time

Ever wonder how the federal government spends money? Planet Money walks you through exactly where the U.S. spent its ~$4 trillion last year. To make it more tangible, the ten-minute podcast is broken up the same way the U.S. divided the money.

Listen here

From AlexPrepare to be Impressed

Decided to keep it light and fun this week. The takeaway—human beings really are awesome, and are capable of amazing things. Let me know which feat you’re most impressed by.

People are awesome

From WillMaking Friends With Dale

I dedicated myself to more bedtime reading this week and reread one of my favorite books, How to Win Friends and Influence People by Dale Carnegie. Probably my third time reading this classic, but I still find myself learning new and actionable lessons each time. People say the book is common sense, but unfortunately, common sense isn’t always common practice!

This one’s a page turner

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Question of the Day

How can you give someone $63 using six bills without using any one dollar bills? (Give up?)
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Who Am I?

  • had a freestyle rap battle with President Obama.
  • I started a hip hop comedy group called Freestyle Love Supreme.
  • I’ve won two Tonys, a Pulitzer Prize, an Emmy and a Grammy.
  • wrote In the Heights during my Sophomore year at Wesleyan University.

(Got any guesses?)

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Stat of the Day

10 hours and 39 minutes

That’s how much time the average American spentconsuming media across different platforms in 2016. Oh, by the way…that’s each day.

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