(Berkshire Hathaway story updated for Friday closing price versus indices)
OMAHA, Neb. (
) -- Warren Buffett's
is finally headed into the S&P 500 Index, but is it also about to rival the S&P 500 as a U.S. equities trading tool?
Traders are comparing the recent Berkshire Hathaway news -- both the stock split that brought its B share price down to the $70 range as well as the S&P 500 inclusion -- as watershed events for the trading community in terms of analyzing Berkshire's potential as a U.S. equities market proxy.
There have been reams written in the past two weeks about the significance of the Berkshire Hathaway news developments, from the index funds that will have to move en masse into the Warren Buffett investment company, to the sudden interest from retail investors for the formerly off-limits Berkshire Hathaway shares.
To be sure, traders made some short-term profits on playing the ebbs and flows of Berkshire Hathaway shares in the late January period, when the stock popped from $68 to $78 -- a 52-week high which Berkshire attained on Monday, Feb. 1, before heading back down.
"Lots of my traders started chirping about the Berkshire B shares, and that led me to start doing technical work on Berkshire Hathaway," said Scott Redler, chief strategic officer at T3 Capital. "The short-term action from the catalyst of the stock split has subsided, and some guys made some good money, but now traders are keeping an eye on it and it will be in play a lot more than it was because of the price difference and liquidity," Redler added.
The most significant issue for the trading community is if Berkshire shares can now be leveraged as a long-term trading tool -- in effect, a unique opportunity to trade a single stock in the same way that traders now use exchange-traded funds as a market proxy.
Just a few years ago, exchange-traded funds were a niche product for institutional traders. Now, there is rarely a day that the
SPDR S&P 500 ETF
PowerShares QQQ Trust
are not among the most actively traded securities in the market.
The SPDR S&P 500 ETF has an average daily volume of shares traded above 165 million shares; the PowerShares QQQ Trust has an average daily volume of above 100 million shares.
Traders say it is still too early in the mass trading era of Berkshire Hathaway to know how the Warren Buffett stock may be used as a market exposure tool, but they are actively studying Berkshire's trading dynamics.
For one, Berkshire still has to re-price based on its newfound liquidity. Berkshire spiked even while the equity markets were dropping last week, though this week, it has come back in line with market performance.
Once traders are confident that the pricing in Berkshire Hathaway shares has stabilized, the trading community should be able to gain a read on how to trade Berkshire on big market moves.
Jeff Tomasulo, a senior trader at SMB Capital, said, "I have to admit, in the past I never referenced Berkshire Hathaway as a market indicator or an economic indicator. I think the spilt has given the trading community and the retail investor the opportunity to gain exposure to the market through the Warren Buffet way."
Tomasulo said this is a significant development on many levels. First, it gives active trader another macro indicator -- i.e., the health of US economy. Secondly, it allows traders to use the Berkshire B shares the way they trade ETF's.
"I use ETF's like the SPY, the DIA, and the QQQQ to get exposure to broad or specific indices or sectors, when the market or sector becomes oversold or overbought. I was able to use BRK.B a few times over the past week to get that exposure," Tomasulo said.
Elliot Turner, an analyst and trader at T3 Capital, provided a few examples of how Berkshire Hathaway shares could present unique trading plays, though he stressed it is still too soon to draw concrete conclusions.
For one, Berkshire Hathaway could represent a "flight to safety" play for equity investors. Turner explained that when the markets were being hit really hard, traders noted a sudden flight into
as a defensive measure.
"When the markets were really tanking in January of last year, Exxon kept holding up, and that was a flight to safety trade, a company where there are profits that potential investors know will be there, and won't be severely threatened relative to everything else," Turner said, adding that investors can short the market while maintaining long exposure to bellwether stocks to protect capital. "You couldn't do that in the past with Berkshire because it put the trader in a liquidity trap," Turner said.
As far as using single stocks for a defensive equities play, Berkshire is a much better option than Exxon, or any other security because of its diversification across banking, insurance and several U.S. cyclical sectors, from housing to consumer spending and transportation. "Considering Berkshire's diversity and business lines, it should reflect a fundamental valuation of the overall U.S. economy," Turner said.
Turner thinks Berkshire could be a U.S. market macro play that allows traders to bypass the flaw of the Dow Jones Industrial Average being price-weighting. "One thing I really don't like about the DJIA is that it is a price-weighted index," Turner said.
Turner explained that when
reported weak earnings and dropped 11%, the DJIA was barely down because
, another DJIA component with a much higher price, was up by a little more than 1%. Alcoa's 52-week high is $17.60 versus an IBM 52-week high of $134.25.
"Alcoa's 11% drop and IBM's 1% gain had an equal effect on the DJIA, and that doesn't tell me enough about the markets, whereas with Berkshire, there is just such a wide variety of lines of business. They have financials covered, there are holdings across the board in insurance, and commercial banks, retail banks and investment banks," Turner said. "In this respect, Berkshire's B shares can given me a more valid reflection of the U.S. market than the Dow."
Turner said no trading tool will replace the importance of the S&P 500 Index, and the SPDR 500 ETF remains his favorite proxy for the big picture.
Thursday and Friday of this past week were days that featured a high level of market uncertainty, with the Dow dipping below 10,000 on both days -- though closing above the 10,000 level ultimately.
Fears linked to lingering U.S. unemployment -- even though the total unemployment rate fell to 9.7%, its lowest level since August -- and a potential worsening in the situation among European nations like Greece and Spain, led to a big pullback in equities.
Whether Berkshire Hathaway will be a good defensive equities play long-term is debatable, but it did outperform the indices on the rocky trading days of Thursday and Friday.
On Thursday, the the S&P finished down 3.1%, while Berkshire was down a little under 2.4%. Financials were down close to 4% on Thursday.
On Friday, the S&P and Dow finished trading marginally positive -- with 0.3% and 0.1% gains respectively -- while Berkshire Hathaway finished up 1.3%. The financial sector was also up marginally on Friday, with a gain of 0.4%.
SMB Capital's Tomasulo said he has been doing back-testing on Berkshire Hathaway to see where it diverges from other indices. Over the past five years, while the S&P 500 was down 23%, Berkshire returned 4%.
"I would like to use Berkshire like an ETF once I find the correlations with other indices. It's just a matter of time before we can ascertain what it can serve as a hedge against," Tomasulo said. "It gives you so much access to different industries and another vehicle to trade, especially during craziness. That's what I'm hoping for BRK.B."
-- Reported by Eric Rosenbaum in New York.
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