It's not easy to add exposure to the banks right now. As I have written since... prior to when this whole banking crisis started, I had cut my personal exposure in half. By personal exposure, I mean Bank of America (BAC) and Wells Fargo (WFC) as these are the only two banks that I was still in. Fortunately, they are both large money center type banks, both domestic in nature and both more reliant upon traditional banking as a means toward driving profitability.
While that last item mentioned might be problematic in an era of difficulty in creating net interest margin, it's also a positive as these banks rely less on trading and investment banking than do their key rivals. Trading, either in debt securities or equities, as we have seen, can be quite problematic, and investment banking is truly headed for some even tougher sledding if we do enter into a recessionary period.
So, Trade?
Well, yes. As I have mentioned on camera and in written word, while maintaining that 50% (of my original full size) exposure in terms of shares, I have been trading smaller sized trades around those core positions. In fact, I added to both BAC and WFC late Friday and am willing to part with those trades - but not the core - for a few pennies either way. I was hoping that there would be a deal overseas, which there was. That said, I thought that if they cut UBS Group (UBS) a fairly sweet deal, which they did, that there might be something of a temporary Monday morning pop in our banks. So far, no dice, but these names were not really much lower either.
Where To Go?
I mean other than T-Bills. I mean, if you have been with me then, we are running, partially due to the banking sales, with ever higher cash levels. Remember when folks mocked high cash levels? Not anymore. That said, how about Berkshire Hathaway, the B stock (BRKB) , as a place where one can maintain some exposure to the financials (yes through BAC, but also through insurance), while letting Warren Buffett and his team diversify the investment for you. I mean you'll be in Apple (AAPL) , Occidental Petroleum (OXY) , and even the rails through Burlington Northern Santa Fe.
At last glance, I think Apple weighed a rough 44% upon Berkshire's public portfolio, and Bank of America close to 9%, but after that, the portfolio is nicely spread out across technology, staples, industrials and a number of different kinds of financials. Maybe I'm thinking of initiating a long position in Berkshire Hathaway with at least a portion of the capital created when I cut my banks in half.
Fundamentals
Berkshire reported in late February, so we are probably two months away from hearing from the firm again. For the quarter ended in December, Berkshire drove operating cash flow of $10.201B. After capital expenditures of $4.557B, the firm was left with free cash flow of $5.644B. This was up from $3.763B for the same quarter a year prior, by the way.
Looking at the balance sheet, Berkshire Hathaway ran with a cash position of $128.585B and current assets of $203.429B. Of that number, inventories made up $25.366B. Current liabilities at that time added up to $62.502B. This left the firm with a current ratio of 3.25 and a quick ratio of 2.84. Both of these ratios are strong to very strong.
Total assets amounted to $948.452B, including $108.598B in goodwill and other intangibles. At 11% of total assets, I see no problem here at all. Total liabilities came to $467.835B, including long-term debt of $107.353B. Even when adding to that number the $15.391B in short-term debt and long-term debt labeled as current, the firm could pay off that entire debt-load out of cash if need be. This balance sheet is golden.
The Chart
Berkshire had a tough week last week, but not quite as tough as did the pure financials. The stock comes into this week trading at 18 times forward looking earnings.
One positive that I think we can all take heart in if we are interested in Berkshire is that the firm will step in if a deal develops where they are somebody's white knight but only if the deal creates an easily sustainable path toward profitability. That's the Buffett way.
Readers will see that BRKB tried to break out from a double bottom reversal pattern with a $308 pivot late last autumn. What had developed upon the stock having apexed around $320 was a basing pattern that has lasted for these past four months.
Last week, BRKB traded below the $297 December low as both its RSI (Relative Strength Index) and daily MACD (Moving Average Convergence Divergence) showed signs of deterioration. How low can BRKB go? The stock has made either a short-term top or short-term bottom around $282 a number of times. There could be some algorithmic activity there. I am not thinking of grabbing any of these here and now in the mid-$290's, but anywhere from the low $280's down, I think is interesting.
A trader could sell May 19th BRKB $280 puts for around $6, and maybe purchase a like amount of the May 19 $270 puts just to make sure said trader does not get his face ripped off. These puts should not cost the trader more than $4, leaving the trader with a net credit of around $2. This would put the trader's net basis if forced to eat the shares in May at approximately $278.
Should the stock take off and never approach $280, the trade pockets the $2 credit. Should the stock head for the depths of the netherworld, the trader has already built in his or her out trade at $270.
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