Even The Big Guys Can Stumble
On Monday, the Wall Street Journal revealed that even the big guys can stumble. In this case it was Warren Buffett of Berkshire Hathaway. His purchase of Kraft Heinz Co. was a classic Warren Buffet play. A business that was easy to understand and loaded with historical American brands. When he bought the companies and combined them four years ago he knew it was the kind of deal that has made him billions over the past 50 years. This time it didn’t work.
What happened is similar to what is happening to America. The current generation does not want the processed foods that I grew up with and loved. They want to eat healthy and the prepackaging of long-time favorites such as Oscar Meyers hot dogs is not making any money. The shift has been abrupt and caught the 84-year-old billionaire off guard. You have to give Mr. Buffett a mulligan on this one. He has done so many of these deals in his hall of fame career that he is allowed to take a hickey now and again.
In his annual letter he revealed that Berkshire Hathaway was taking a write down on the Heinz Kraft deal of $15.4 billion, a tidy sum by any yard stick. On the other hand, Mr. Buffett has always believed that strong consumer demand is the way to go. When everyone was dumping railroad stocks ten years ago, he realized that the promised pipe line would struggle with the environmentalist so he bought tank cars and railroads. He was right on that one and made billions.
How much did he lose last year after the misstep? Nothing. He made money! In a year in which the major indexes did little or nothing at all the oracle of Omaha still turned a $4 billion-dollar profit. Granted it was down a little from the $44 Billion he made in 2017 but he still cashed a ticket. That is why he is one the greatest investors of all time. He has lived in the same house for 40+ years, drives a 13-year-old Cadillac and stops at Mickey D’s five days a week for his egg McMuffin. He is my kind of guy.
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
What is the VIX index and how is it calculated?
Answer: VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts and is a widely used measure of market risk as to the “investor fear gauge”. The CBOE designed the VIX to create various volatility products. The VIX, however, was the first successful attempt at creating and implementing a volatility index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later in 2004, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the prices of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. There are twenty-four other additional volatility exchange-traded products (ETPs) which when added to VIX, brings the total number to twenty-five.
The Wise Guy Report: The View From The Floor
Each week I talk about how the Wise Guys (floor traders) find the soft spots in the market and take advantage of price dislocation in three major commodity markets: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). On the equity side, I cover MSS which is the Mister Seifert Sez Composite Index. This is a proprietary index that I created which measures the dollar flow of the four major indexes (S&P 500, Nasdaq 100, Russell 2000 and the Dow Jones Industrials) on an unweighted basis. This week Let’s look at how the Crude Oil market has performed since the start of 2019.
Crude Oil: (Bullish)
After getting hammered last quarter when the market collapsed, liquid gold has seen a sharp turnaround. The problem is when a market losses more than 50% of its value, it takes a 100% rally to get back to the tops. Since its nadir on Christmas Eve, crude has rallied from a low of about $42 to its current level around $57. No matter how you look at it, that is a heck of a rally. Where we go from here is anyone’s guess, but it appears that we are in the start of a new bull run and maybe we can get up to the $76 level again. You can enter this market on the long side anytime you please, but I think with the longs being the strong hands, I would be reluctant to try and stop this puppy from the short side.
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Mr. Seifert