MorningWord 5/6/13: Omaha Stakes $BRKB

by Dan May 6, 2013 9:15 am • Commentary

MorningWord 5/6/13:  Not sure about you guys but since Friday evening, when Berkshire Hathaway reported Q1 results that handily beat Wall Street expectations and CEO Warren Buffett hosted the company’s annual shareholder meeting, I need a little Buffer from the Oracle of Omaha.  To attempt to knock at this routine and long term investment success is just ridiculous – there are probably few that have ever been better.  But at this point, after all these years, my sense is that the real “alpha” generated in his vast portfolio of corporate and equity holdings has a ton to do with the sweetheart deals he gets during crisis.  While the rest of the financial world was melting btwn 2008 and 2011, from the U.S. to Europe, Buffett sat back in his humble surroundings and waited for the phone to ring from the C-Level suite of almost every major financial institution looking to get the “Buffett Bump” in the form of a crisis deal that would likely be the floor in the stock.  You know whose call he didn’t pick up? Alan Schwartz (Bear Stearns) or Dick Fuld (Lehman Brothers). But he most certainly picked up Lloyd Blankefien (GS), Jeff Immelt (GE), and Brian Moynihan’s (BAC) calls!  And he is very glad he did as the deals he struck earned far greater profits than if he had just bought the stock at the time!

It’s just amazing to me that the guy who was the investor of last resort for some of the largest financial institutions in the world during the worst financial crisis since the Great Depression still had holdings in companies like Dairy Queen, Sees Candies & Fruit of the Loom all under the same umbrella.

Despite the massive Berkshire Love-Fest over the last 72 hours, my Options Action friend Carter Worth of Oppenheimer, attempted to rain on the Buffet parade Friday evening, with his bearish technical view on the stock:

Carter thinks that in the case of BRK/B  “Price is  Discounting the Facts”.  I don’t have a view on the stock other than as long as the market keeps chugging along, so will Berkshire as the stock has essentially traded in lock step with the SPX since the 2009 bottom sporting an almost identical gain off of the lows.

Carter thinks the stock could have met an inflection point given certain technical divergences.  The producers of Options Action asked me to construct a trade structure that would be inline with Carter’s near term bearish view and give a good defined risk, risk/reward structure.  Again I have no position in BRK/B and never have, but if you wanted to try to “Fade the Oracle” btwn now and Sept this is one way to do it (the stock is up 2.50 in the pre-market, so this was based off of Friday’s close of $108.65):

Theoretical Bearish Trade: BRK/B ($108.65) Buy Sept 105/100 Put Spread for 1.20

-Buy 1 Sept 105 Put for 2.60

-Sell 1 Sept 100 Put at 1.40

Break-Even on Sept Expiration:

-Profits btwn 103.80 and 100 of up to 3.80, max gain of 3.80 at 100 or below.

-Losses of up to 1.20 btwn 103.80 and 105 and max loss of 1.20 above 105.

Trade Rationale:  Frankly if you wanted to be short BRK/B I don’t think you have to worry a whole heck of a lot about this stock adding another 20% any time soon at all time highs and up 21% on the year already, but if you are looking to trade it, risking ~1% over the next 4 months to play for an ~8.5% sell off that pays 3 to 1 with defined risk seems like a decent way to do it.

I guess in sum, it doesn’t make a lot of sense to bet against Buffett, just like it didn’t make a lot of sense to bet against Steve Jobs at AAPL.  But all good things come to an end as was brutally evidenced by AAPL’s rise and fall since Jobs death. But in the case with AAPL, the aftershocks of  departure (for the company and the stock) were not felt for almost a year.  Shorting stocks because of key man risk isn’t smart, but when you have a company where the founder and leader of the company is the “special sauce” so to speak, investors have to remain vigilant.  This warning is probably more directed at new investors in the stock who expect another 30 years of performance similar to the last 30.  My sense is you probably won’t get it.