Saturday, February 28, 2009

Berkshire Hathaway Annual Report/Letter

The Berkshire Hathaway 2008 Annual Report and heavily read Annual Letter have just been released.

Some quick notes (text from the letter in bold):

Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

We are completely screwed as a country if this continues. Rewarding bad companies at the expense of good companies can only lead to financial ruin.

In the past, Warren Buffett has referred to derivatives as "weapons of massive financial destruction." Therefore it is puzzling why Berkshire Hathaway began to play heavily in derivitives in the past few years:

To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at, say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million. If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to $150 million – that we would be free to invest as we wish.

What a disingenuous example! Who would possibly buy a put contract (insurance) that pays out equal to the premium in the absolute worst case scenario?

Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24, 2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black- Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9 billion in premiums we have received – means that we have so far reported a mark-to-market loss of $5.1 billion from these contracts.

I like the real life example better. So far Berkshire has taken a massive write down on their derivatives. I’m not saying the contracts will result in a long term loss for Berkshire, but right now they do not look pretty. Read the whole letter for Buffett's somewhat convincing arguments for these positions.

Besides that, I found the “folksy wisdom” scattered throughout the report really annoying. “As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.” Buffett has always written this way, but it seems like he turned it up a notch this year. Maybe I am just being cranky. Shrug.

Saturday, February 21, 2009

The 2 Buck Club

I would like to give a warm welcome to this week's newcomers to The So? 2 Buck Club (stocks that are priced under $2 a share).

Citigroup (C) $1.95: Already the reigning champion of the TARP government fund tournament, will Citigroup soon be the next winner of the government nationalization sweepstakes?

General Motors (GM) $1.77: GM presented the government with an updated plan for a "viable" and "sustainable" company. In turn, they have asked for $16.6 billion in new loans. I ask you - does it make sense to loan a company $16.6 billion when it has a market capitalization of $1.08 billion?

Saks (SKS) $1.70: Rich is just so out this fashion season.

Let's not forget about our longer standing club members:

Ford (F) $1.58: Ford actually joined the club back in October. Don't fret - all is well.

Sirius XM Radio (SIRI) $0.128: Sirius threatened at membership for years but finally joined the club back in June. Now it is pushing for the ultra exclusive 2 cent club. Nobody likes a showoff. For now that will have to wait as they have been given liberty as opposed to death.

Fannie Mae (FNM) $0.540: Fannie collapsed because they purchased mortgages of poor quality that have since gone into default. So what is our solution to this problem? We must increase the amount of mortgages that Fannie will purchase. Asian investors have issues with this approach.

E*TRADE (ETFC) $0.890: If E*TRADE fails, who will fill the void of meeting the needs of daytrading babies? The government must provide assistance to this vital industry ASAP.

Crocs (CROX) $1.15: First Crocs joined the club. Now Saks has joined. Can you say trendsetter? Plastic shoes are are here to stay baby.

Friday, February 20, 2009

The Humpty Dumpty Economy

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.

Everyone is familiar with the classic Humpty Dumpty nursery rhyme. What does it have to do with the economy?

For the answer, here is a must watch video clip featuring former Chairman of the Federal Reserve and current Chairman of the Economic Recovery Advisory Board, Paul Volcker:

There is an astounding amount of wisdom displayed in this rambling seven minute speech. Here is one of the many money quotes:

"One aspect of capitalism, which I will call relatively unbridled financial markets operating on a global basis has broken down, and it's broken down in a way that I don't think can be replicated in the form that it took earlier"

Clear as day my friends. Humpty Dumpty had a great fall and all the king's horses and all the king's men couldn't put Humpty together again.

Our global economy was built on an unstable foundation and as a result the economy now lays in shambles. No amount of quick fixes will put the economy back together again. A new economic foundation is required for long term, stable growth.

Monday, February 16, 2009

Commodity ETFs and ETNs Update II

This is an update to my previous article Commodity ETFs and ETNs Update that was posted on January 18, 2009. It has been one month since that article so I wanted to take a look at my performance and re-evaluate going forward.

On January 18, I listed picks and pans. Here is my performance since:

FundPrice on 1/18Price on 2/16% Change
GLD (Gold)82.7192.55+11.90%
LD (Lead)31.1331.24+0.35%
NIB (Cocoa)38.8842.06+8.18%
BAL (Cotton)28.1326.38-6.22%

FundPrice on 1/18Price on 2/16% Change
UNG (Natural Gas)19.8318.32-7.61%
JJU (Aluminium)22.1421.15-4.47%
COW (Livestock)32.8132.36-1.37%

If you invested $1,000 in each of the four picks you would be up 3.55% and have made $142.08. This compares to -4.49% and a loss of $132.68 with the three pans. If you went long the picks and short the pans you would be up 3.93% and have made $274.76. I hate to boast but even I am surprised by my strong performance.

Let's take a look at the updated charts. At the end I will list my updated picks and pans. Click on all charts for larger views.

USO (United States Oil Fund)
Current price: 25.60
52 week high/low: 119.17/25.17
% off high/low: -78.52%/+1.71%
1 year chart with bollinger bands

UNG (United States Natural Gas Fund)
Current price: 18.32
52 week high/low: 63.89/17.87
% off high/low: -71.33%/+2.52%
1 year chart with bollinger bands

Both oil and natural gas made new 52-week lows in the past month. Both may be leveling off at this point, however, so I am removing my short position from UNG. I think it is time to go long both USO and UNG.

GLD (SPDR Gold Trust)
Current price: 92.55
52 week high/low: 100.44/66
% off high/low: -7.86%/+40.23%
1 year chart with bollinger bands

SLV (iShares Silver Trust)
Current price: 13.54
52 week high/low: 20.73/8.45
% off high/low: -34.68%/+60.24%
1 year chart with bollinger bands

PTM (UBS E-TRACS Platinum)
Current price: 13.05
52 week high/low: 27.29/8.56
% off high/low: -52.18%/+52.45%
4/1/2008 to Present chart with bollinger bands

Gold, silver and platinum have all moved up nicely in the past month so I think they are due for a rest. Silver has gotten ahead of itself the most, so I will short SLV at these levels. There were no new 52 week highs/lows for this group in the past month.

JJC (iPath Copper)
Current price: 21.74
52 week high/low: 58.40/17.97
% off high/low: -63.77%/+20.98%
1 year chart with bollinger bands

JJU (iPath Aluminum)
Current price: 21.15
52 week high/low: 54.16/20.45
% off high/low: -60.95%/+3.42%
6/25/2008 to Present chart with bollinger bands

JJN (iPath Nickel)
Current price: 15.49
52 week high/low: 53.46/13.80
% off high/low: -71.03%/+12.25%
1 year chart with bollinger bands

JJT (iPath Tin)
Current price: 24.27
52 week high/low: 52.46/21.79
% off high/low: -53.74%/+11.38%
6/25/2008 to Present chart with bollinger bands

LD (iPath Lead)
Current price: 31.24
52 week high/low: 62.20/23.87
% off high/low: -49.77%/+30.88%
6/26/2008 to Present chart with bollinger bands

Lead still looks like the strongest in this group and so I will maintain my long stance in LD. Aluminum (JJU) still looks very weak, so I reiterate my pan on it. In this group, only aluminum made a new 52-week low in the past month.

NIB (iPath Cocoa)
Current price: 42.06
52 week high/low: 48.23/30.21
% off high/low: -12.79%/+39.23%
6/25/2008 to Present chart with bollinger bands

JO (iPath Coffee)
Current price: 35.17
52 week high/low: 49.79/32.40
% off high/low: -29.36%/+8.55%
6/25/2008 to Present chart with bollinger bands

BAL (iPath Cotton)
Current price: 26.45
52 week high/low: 46.65/23.19
% off high/low: -43.30%/+14.06%
6/26/2008 to Present chart with bollinger bands

SGG (iPath Sugar)
Current price: 46.15
52 week high/low: 57.65/36.36
% off high/low: -19.95%/+26.93%
6/25/2008 to Present chart with bollinger bands

DBA (PowerShares DB Agriculture)
25% corn, 25% soybeans, 25% sugar, 25% wheat
Current price: 25.20
52 week high/low: 43.50/21.52
% off high/low: -44.37%/+12.45%
1 year chart with bollinger bands

Last month, I recommended cocoa and cotton but noted that the entire group looked strong. Cotton (BAL) now looks like the weakest of the group so I will remove my recommendation. I will add sugar (SGG) and coffee (JO) to my recommended list. In the past month, there were no new 52-week lows in this group.

COW (iPath Livestock)
67.9% live cattle, 32.1% lean hogs
Current price: 32.28
52 week high/low: 46.66/30.33
% off high/low: -30.49%/+6.43%
1 year chart with bollinger bands

Livestock has continued to fall and make new lows in the past month. I reiterate my pan of COW.

Here are my updated picks and pans as of 2/16/2009. Overall, I changed about half my selections since last month. I am a bit apprehensive about going as heavy as I have in agriculture, but I think this is going to be the place to be in 2009 so I am investing that way.

USO (Oil)
UNG (Natural Gas)
LD (Lead)
NIB (Cocoa)
SGG (Sugar)
JO (Coffee)

SLV (Silver)
JJU (Aluminum)
COW (Livestock)

Wednesday, February 11, 2009

Financial Blog Roll Call

Sorry for the lack of updates lately. I have been concentrating my energies on taking advantage of the perfect trading opportunities that have been presenting themselves lately. Without a doubt this is a trader's market. If the United States had a sane economic policy then building a portfolio of assets to hold long term would make sense. With our insane economic policies, however, it only makes sense to trade this market. Someday the Benjamin Graham playbook will have to be dusted off again but for now you might as well throw fundamental analysis out the window.

OK, on to the topic of this post. I wanted to take a few minutes to summarize some of my favorite financial websites. The mainstream news sources have their place but without a doubt if you ignore the financial blogging community you will miss out on the most important economic insights. If you have other sites that are worth checking out, post them in the comments section.

The Big Picture - Barry Ritholtz is a one of a kind market commentator. He is not afraid to get down and dirty in calling out the financial fraudsters. His upcoming book, Bailout Nation, was allegedly shelved by McGraw-Hill because of the shots that Mr. Ritholtz took at Standard & Poor's, which is owned by McGraw-Hill. Hopefully he is able to find a new publisher soon.

Calculated Risk - Probably the best general economic blog on the internet. CR has by far the best housing market charts, which they update when the new numbers come in. CR also has an incredibly active user comments community, though sometimes there are so many posts that one cannot possibly keep up!

Jim Sinclair's MineSet - Only gold bugs need apply. MineSet is the blog of Jim Sinclair, the owner of the Tanzanian Royalty Company, and well known gold market commentator. Conspiracy theories abound but there is the occasional news item posted that I somehow missed.

Market Ticker - Saying that Karl Denninger has a unique perspective is an understatement. His commentary is brash, angry, demanding, prone to rambling and often spot on. He can suffer from a case of assuming that everyone knows exactly everything that he does, however, and so he miscalculates the human side of his analysis. Beware the message board - it is mostly a crowd of ditto heads.

Mish's Global Economic Trend Analysis - The worst named financial blog of all time is also one of the best. Mish is basically a less manic version of Karl Denninger. His writing style can grow tiring but his market analysis is quite good. I do, however, take exception with the way he attacked Peter Schiff in a recent posting.

Nathan's Economic Edge - Economic Edge is one of the more recent blogs I was lucky to stumble upon. Nathan provides excellent daily technical analysis of the markets. In the short time I have been following him he has been spot on.

RGE Monitor - The blog of Nouriel Roubini, the prominant economics professor at NYU School of Business, is definitely worth a look during these tough economic times. Roubini forcasted much of the economic crisis years in advance and has been spot on throughout.

Soot and Ashes - This is the offshoot of the now defunct Housing Panic, the best housing crash blog around. Housing Panic was started in 2005 because the author, Keith, was certain that housing was ready for an epic collapse. Boy was he right. His new site still discusses the housing market but also dabbles in the general economy and politics.

Sunday, February 1, 2009

American Recovery and Reinvestment Act

Last Wednesday the House of Representatives passed the American Recovery and Reinvestment Act of 2009. In its current form, the act amounts to $819 billion in additional spending. It still has to make its way through the Senate where additional allocations are expected.

You can read the act in its current form here. There are legitimate infrastructure provisions outlined in the act such as allocations for energy efficiency, alternative energy , expansion of broadband internet access and projects for the army corps of engineers. There are also some questionable provisions and one very funny section aimed at a certain disgraced former Governor. Here are some highlights:

In addition to funds otherwise made available in this Act, there are hereby appropriated the following sums to the specified Offices of Inspector General, to remain available until September 30, 2013, for oversight and audit of programs, grants, and projects funded under this Act:
(1) ‘Department of Agriculture--Office of Inspector General’, $22,500,000.
(2) ‘Department of Commerce--Office of Inspector General’, $10,000,000.
(3) ‘Department of Defense--Office of the Inspector General’, $15,000,000.
(4) ‘Department of Education--Departmental Management--Office of the Inspector General’, $14,000,000.
(5) ‘Department of Energy--Office of Inspector General’, $15,000,000.
(6) ‘Department of Health and Human Services--Office of the Secretary--Office of Inspector General’, $19,000,000.
(7) ‘Department of Homeland Security--Office of Inspector General’, $2,000,000.
(8) ‘Department of Housing and Urban Development--Management and Administration--Office of Inspector General’, $15,000,000.
(9) ‘Department of the Interior--Office of Inspector General’, $15,000,000.
(10) ‘Department of Justice--Office of Inspector General’, $2,000,000.
(11) ‘Department of Labor--Departmental Management--Office of Inspector General’, $6,000,000.
(12) ‘Department of Transportation--Office of Inspector General’, $20,000,000.
(13) ‘Department of Veterans Affairs--Office of Inspector General’, $1,000,000.
(14) ‘Environmental Protection Agency--Office of Inspector General’, $20,000,000.

(15) ‘General Services Administration--General Activities--Office of Inspector General’, $15,000,000.
(16) ‘National Aeronautics and Space Administration--Office of Inspector General’, $2,000,000.
(17) ‘National Science Foundation--Office of Inspector General’, $2,000,000.
(18) ‘Small Business Administration--Office of Inspector General’, $10,000,000.
(19) ‘Social Security Administration--Office of Inspector General’, $2,000,000.
(20) ‘Corporation for National and Community Service--Office of Inspector General’, $1,000,000.

There is hereby appropriated as an additional amount for ‘Government Accountability Office--Salaries and Expenses’ $25,000,000, for oversight activities relating to this Act.

This totals $233.5 million just for oversight. The numbers we deal with today are so big that it is hard to keep any sort of perspective. $233.5 million used to be considered a lot of money.

(a) In General- None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States.

Time to buy some X (US Steel) stock?

None of the funds provided by this Act may be made available to the State of Illinois, or any agency of the State, unless: (1) the use of such funds by the State is approved in legislation enacted by the State after the date of the enactment of this Act; or (2) Rod R. Blagojevich no longer holds the office of Governor of the State of Illinois. The preceding sentence shall not apply to any funds provided directly to a unit of local government: (1) by a Federal department or agency; or (2) by an established formula from the State.

They stuffed an anti-Blagojevich clause into the bill! Since he is now out of office it will not apply but that is just funny to me.

Farm Service Agency
salaries and expenses
For an additional amount for ‘Salaries and Expenses,’ $245,000,000, for the purpose of maintaining and modernizing the information technology system

$245 million for farming computers? Those must be pretty powerful computers. There are lots of other provisions in the act for computer equipment. Should we specify that all computer parts be manufactured in the USA? Hmm...that might be difficult to implement.