Global Market Comments
March 4, 2021
Fiat Lux
Featured Trade:
(THE BARBELL PLAY WITH BERKSHIRE HATHAWAY),
(BRKA), (BRKA), (BAC), (KO), (AXP), (VZ), (BK) (USB),
(TLT), (AAPL), (MRK), (ABBV), (CVX), (GM), (PCC), (BNSF)
Posts
It’s time to give myself a dope slap.
I have been pounding the table all year about the merits of a barbell strategy, with equal weightings in technology and domestic recovery stocks. By owning both, you’ll always have something doing well as new cash flows bounce back and forth between the two sectors like a ping pong ball.
After all, nobody gets sector rotation right, unless they have been practicing for 50 years, like me.
Full disclosure: I have to admit that after 50 years of following him, I love Buffet. He was one of the first subscribers to my newsletter when it started up in 2008. Some of his best ideas have come from the Mad Hedge Fund Trader, like buying Bank of America for $5 in 2008.
Oh, and he hates Wall Street for constantly fleecing people. Ditto here.
In reading Warren Buffet’s annual letter (click here for the link), it occurred to me that his Berkshire Hathaway (BRKB) shares were in effect a one-stop barbell investment.
For a start, Warren owns a serious slug of Apple (AAPL), some $120 billion worth, or 2.5% of the total fund. That gives (BRKB) some technology weighting. It cost him only $20 billion. The dividends he received entirely paid for the initial cost. So he owns 4% of Apple for free.
I remember the battle over the initial “BUY” five years ago. Warren fought it, insisting he didn’t understand the smart phone business. In the end, he bought Apple for its global brand value alone.
That is Warren Buffet to a tee.
The next five largest publicly listed holdings are Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Verizon Communications (VZ). These are your classic domestic recovery sectors. And with a heavy weighting in other banks (BK) (USB), Buffet is effectively short the bond market (TLT), another position I hugely favor.
Also included in the package is a liberal salting of pharmaceuticals, Merck (MRK) and AbbVie (ABBV). He has a small energy weighting with Chevron (CVX). He even has a position in old heavy metal America with General Motors (GM).
Berkshire is also one of the world’s largest property & casualty insurance owners. Its current “float” is $138 billion. You all know his flagship holding, GEICO. And the gecko mascot isn’t going anywhere as long as Warren lives. It was Warren’s idea.
It all seems to work for Warren. In 2020, he earned a staggering $42.5 billion. All told, Berkshire’s businesses employ 360,000, second to only Amazon (AMZN), and is the largest taxpayer in the United States, accounting for 3% of government revenues. Berkshire is also the largest owner of capital goods & equipment in the US worth $156 billion, topping (AT&T).
Many of Warrens's early 1956 $1,000 investors are millionaires many times over….and over 100 years old, prompting him to muse if ownership of his shares extended life.
Warren’s annual letter, which he spends practically the entire year working on, is always one of the best reads in the financial markets. There isn’t a better 50,000-foot view out there. He also admits to his mistakes, such as his disastrous purchase of Precision Castparts (PCC) in 2016 for $37 billion, which later suffered from the crash in the aerospace industry. In 2020, Buffet wrote off $11 billion of that acquisition.
He can do worse. In 1993, he bought the Dexter Shoe Company for $433 million worth of Berkshire stock. The company went under, but the Berkshire stock today is worth $8.7 billion.
Buffet’s letters always refer back to some of his “greatest hits,” today legends in the business history of the United States: GEICO, Furniture Mart, Berkshire Hathaway Energy, and See’s Candies, one of the largest employers of women in the US using 150-year-old recipes. Its peanut brittle is to die for.
In 2009, Buffet snatched away from me BNSF for a song, now the most profitable railroad in the country, an amalgamation of 360 railroads over 170 years. I say “snatched away” because it was my favorite railroad trading vehicle for decades until he bought the entire company. I hear its trains run by my home every night as a grim reminder.
Another benefit to owning (BRKB) is that Buffet is far and away the largest buyer of his own shares, soaking up $25 billion worth in 2020. And he is buying the shares of other companies that are also aggressively buying their own shares, like Apple ($200 billion with last year). It all sounds like the perfect money creation machine to me.
It gets better. Berkshires “B” shares trade options, meaning you can buy LEAPS (Long Term Equity Anticipation Securities), which by now, you all know and love. I’ll run some numbers for you.
With (BRKB) now trading at $254, you can buy the January 2023 $300-$310 call spread for $2.50. If the shares close anywhere over $310 by the 2023 expiration, the position will be worth $10.00, giving you a gain of 300%. And you only need an appreciation of $56, or 22% in the shares to capture this blockbuster profit, giving you upside leverage of an eye-popping 13.63X in the best run company in America.
See, I told you you’d like it.
This is how poor people become rich. In fact, my target for (BRKB) is $300 for end of 2021 and $400 for 2022, right when the two-year LEAPS expire.
One question I often get about Berkshire is what happens when Warren Buffet goes to his greater reward, not an impossible concept given that he is 90 years old.
I imagine the shares will have a bad day or two, and then recover. Buffet has been hiring his replacements for a decade or more, and he handed off day-to-day operation years ago (I didn’t want to move to Omaha, no mountains).
When that happens, it will be the best buying opportunity of the year. And another chance to load up on those LEAPS.
Global Market Comments
February 12, 2021
Fiat Lux
Featured Trade:
(TEN STOCKS TO BUY BEFORE YOU DIE)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
Global Market Comments
April 9, 2020
Fiat Lux
Featured Trade:
(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Microsoft (MSFT) - March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.
Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.
Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back
QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.
Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.
Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.
American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.
NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.
Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.
Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.
Looks Like a “BUY” signal to Me
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 11 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What is the worst-case scenario for this bear market?
A: The average earnings loss for a recession is 13%. Last year, we earned $165 a share for the S&P 500. So, a recession would take us down to $143 a share. Multiply that by the 15.5X hundred-year average earnings multiple, where we are now, and that would take the (SPX) down to 2,200. However, if we get 100 million cases and 5 million deaths, as some scientists are predicting, we could get a 2008 repeat and a 50% crash in the (SPX) to 1,700. With the administration asleep at the switch, that is clearly a possibility. Nice knowing you all.
Q: Do you think we’re still setting up for another roaring 20s?
A: Yes, absolutely. We could not have a roaring 20s unless we got a major selloff and clearing out of old positions like we're getting now. That flushes out all the old capital and positions and paves the way for people to set up brand new positions at really bargain prices. If you missed the 2009 bottom, here's another chance.
Q: Will the fiscal stimulus help defeat the coronavirus?
A: No, viruses are immune to money. They don’t take PayPal or American Express (AXP). The president has been able to buy his way out of all his other problems until now; there’s no way to buy his way out of this one.
Q: Is JP Morgan’s (JPM) Jamie Dimon getting a heart attack related to the financial crisis?
A: Probably, yes. In a normal time, the pressure of a CEO in these big banks is enormous. All of a sudden half of your small customers are looking at bankruptcy—the pressure has to be immense. You've got customers screaming for short term loan facilities, you’ve got risk managers asking for margin extensions. And you certainly don't want to buy the banks here. I think this may be the final selloff with legacy banks, from which they never recover. The banks will disappear and come back online.
Q: What would you do with a $45,000-dollar portfolio right now? I don’t do options.
A: Look at my story on Ten Leaps to Buy at Market Bottom. Use those names—Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), etc.—and just buy the stocks. Buy half now and a half in a month. This is a time to dollar cost average. And you’re looking at doubles at a minimum 3 years down the road—at the end of this year if you’re lucky. Once the virus burns out, it will only take a couple months to do that. Then it will be off to the races once again.
Q: Since the 2018 low was never tested, what do you think of 2400/2450?
A: I think that’s great. And you can get a half dozen different analyses that all come up with numbers around 2400, 2500, 2600. That’s where the final low will be—where you get a convergence of multiple support lines and opinions.
Q: Will buybacks come back or are they over for now?
A: They will come back once markets bottom. Companies aren’t stupid; they don’t like buying their own stocks at all-time highs, but they certainly will come in with major amounts of buying when they see their stocks down 20% or 30%. That's certainly what Apple is going to do.
Q: Will luxury retail shares get killed in the current market?
A: Yes, especially stocks like (LVMH), the old Louis Vuitton Moet Hennessey. They’re already down 37% this year. When it becomes clear that we are in an actual recession, these luxury names across the board will get completely abandoned. By the way, I worked with the son of the founder of this company when I was at Morgan Stanley. We called him “Bubbles.”
Q: Are there any similarities to 2008?
A: Yes; it’s worse because the market is dropping much faster than it ever has before. The 52% selloff in 2008 was spread out over the course of 18 months. Here, it’s taken only 14 trading days to see half of the damage done back then. It’s truly unbelievable.
Q: What do you think about gold (GLD)?
A: Even though gold is going up, gold miners (GDX) are doing terribly because they are stocks. They get tarred with the same brush blackening all other stocks. This is exactly what happened during the 2008-2009 crash. Fundamentals go out the window in these kinds of trading conditions, but they always come back.
Q: Is Europe in recession?
A: Absolutely, yes. I saw an interview with the Adidas CEO (ADDYY) this morning on TV and they said sales are off 90% on a month-on-month basis. Their stock is down 49% this year. You can bet that every other consumer company in Europe is suffering similar declines.
Q: What will real estate do in the next 3 months?
A: It's impossible to price real estate so finely because it's so illiquid. However, I expect it to hold up here because of super low interest rates, and then keep rising over the long term. We’re not going to get anything like the crashes we saw in 2008-2009 because all the excess leverage is not in the real estate market now, it’s in the stock market, where we are getting a much-deserved crash. If anything, I’d be buying rental properties here in low cost cities.
Q: What if the Dow Average (INDU) reaches the 300-day moving average?
A: It’s a nice theory, but technicals are meaningless in the face of panic selling. You don't want to get too fancy looking at these charts. When you have a billion shares to go at market, the 200 or 300 day moving average means nothing.
Good Luck and Good Trading. And stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 5, 2019
Fiat Lux
Featured Trade:
(THE BIPOLAR ECONOMY),
(AAPL), (INTC), (ORCL), (CAT), (IBM),
(TESTIMONIAL)
Global Market Comments
March 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)
Global Market Comments
March 1, 2019
Fiat Lux
Featured Trade:
(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)
Mad Hedge Technology Letter
January 2, 2019
Fiat Lux
Featured Trade:
(THE FANGS' PATH TO ONLINE BANKING),
(SQ), (V), (MA), (AXP), (JPM)
