Interest rates are finally starting to go down. That means the cost to borrow will decline, benefitting highly leveraged companies. But the cost to lend will also decline, meaning that fixed-income investors will get paid less for their holdings.
For long-term bondholders, the price of the bond will rise to match interest rates. This is a concept known as duration. But short-term bond holders don’t have exposure to duration, and will see their bonds roll over at a lower interest rate.
That’s bad news for companies loaded up with U.S. Treasury notes, which most companies use as a substitute for cash. The worst off? Berkshire Hathaway (BRK-B). The conglomerate is sitting on a cash position of over $280 billion.
While the interest on that pile of cash will decline, Berkshire owns dozens of businesses outright, as well as quality dividend-paying stocks. It remains a long-term winner, and is now poised to buy up any market opportunity that arises.
Action to take: Berkshire shares are down almost 5% from their all-time high. Investors may want to use any market weakness over the coming weeks to build a position. While Berkshire doesn’t pay a dividend, it is uniquely able to capitalize on a market crisis.
For traders, shares are likely to trade higher into next year. The January 2025 $490 calls, last trading for about $7.75, could see mid-double-digit returns on a year-end rally.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.