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Bill Cara
Bill Cara's columns :
08/15/2006The Challenge of Bear Markets
07/05/2006Equity Bear Markets in Progress and Why
03/27/2006The importance of holding cash >>
03/06/2006The issues are becoming clearer
03/01/2006A Focus on Yields
02/21/2006Geopolitics and capital markets
01/16/2006North American markets are losing momentum
12/19/2005North American markets are nearing a cycle top
12/12/2005North American markets readying for winter
12/06/2005North American chill in the air
11/21/2005Friday afternoon trapped the bears
11/14/2005Traders have turned bullish, but I'm sitting out
11/07/2005When everybody turns bullish, bad things happen
10/31/2005When told of the impending rally, I ran for cover

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Bill Cara – Trends and Cycles in the US and Canadian Markets

Bill Cara has enjoyed a highly successful securities industry career in Canada and abroad. Today he publishes one of the world's most popular and widely acclaimed trading blogs (www.billcara.com ). His weekly column for ADVFN looks at trends and cycles at work in the US and Canadian capital markets.


The importance of holding cash

03/27/2006

If cash is trash, why is Berkshire Hathaway (NYSE: BRKA) loaded down? Is there no major acquisition worthy of Warren Buffett's interest?

When I tell readers of my trading blog that I am over 75 percent in cash, patiently awaiting what I believe to be potential rewards commensurate with risk, I have my doubters. But Warren Buffett happens to be 46.5 percent in cash - all $40 billion worth, compared to $46 billion invested in securities - and nobody blinks.

Moreover, that cash horde is going to grow by probably $3 billion in 2006 according to Credit Suisse analyst Charles Gates, who Barron's reports as the only analyst from a major Wall Street firm who covers BRKA.

Perhaps it is the fact that Mr. Buffett is (i) personally the world's second richest person, with a holding in BRKA worth $45 billion, and (ii) the standard by which all professional investors and traders measure their performance. So people watch every move of Berkshire Hathaway and every comment of Mr. Buffett like a hawk.

So I ask again, why is Berkshire Hathaway sitting on 46.5 percent cash, and why does Buffett opine that the U.S. Dollar is headed south for the next several years?

I believe that investors and traders are not afraid to be so conservative when (i) fairly low inflation does not quickly erode the value of that cash, and/or (ii) they believe market conditions in the future will present major buying opportunities.

And I suspect that (i) creeping inflation will become problematic, which is why central bankers are pushing rates higher, and (ii) a major bear market will commence sometime in 2006. So, with extra cash, like Buffett, I am positioned to seize those opportunities.

Unlike most money managers on the buy-side or anybody on the sell-side, I have nobody looking over my shoulder pushing me into buying prices I'm not interested in.

If Berkshire Hathaway were to invest, where then could those opportunities come from? And, is that a strategy the public could adopt to their benefit?

I think so. A reasonable position would be to follow what Buffett is both doing and saying.

As for his "doing", let's look at his current holdings. I suspect that if, as and when there is a bear phase in the broad market, the share prices of his portfolio holdings will drop to a point where he'll find those prices attractive.

His eight key equity holdings are:

  1. Coca-Cola (NYSE: KO) $8.54 billion
  2. American Express (NYSE: AXP) $8.23 b
  3. Wells Fargo Bank (NYSE: WFB) $6.17 b
  4. Procter & Gamble (NYSE: PG) $5.94 b
  5. Moody's Investor Services (NYSE: MCO) $3.31 b
  6. PetroChina (NYSE: PTR) $2.32 b
  7. Anheuser-Busch (NYSE: BUD) $1.91 b
  8. Wal-Mart (NYSE: WMT) $0.93 b

So, based on Buffett's superlative track record, it makes sense to me to track the Relative Strength Index (RSI Technical Indicator) for the Monthly and Weekly data series of these stocks, and whenever the indicator turns north, to be into the market accumulating positions or writing puts (to take in option premium or get filled at lower strike prices).

And, as far as Buffett's "saying", which is that he believes the $USD Index is going to weaken over time, it makes sense to me to accumulate positions in the Gold-backed ETF securities GLD and IAU, and the new Silver ETF (SLV) when that one starts trading soon.

But until I see Berkshire Hathaway starting to make new acquisitions or portfolio additions in the order of US$10 billion or more, I am holding back.

Yesterday the U.S. debt and equity markets took a major intra-day hit to prices. After seeing a lot of strength in the morning, the picture abruptly changed for the worst.

Here is the March 22 scorecard:

  • 11 of 11 major U.S. broad market indices DOWN
  • 26 of 28 U.S. industry indices DOWN (only oil services and healthcare)
  • 9 of 9 AMEX Select Sector SPDR ETF's DOWN
  • 18 of 20 Country ETF's DOWN (only Malaysia and Canada were up)

So, cash is not trash. Those who are holding it - like Warren Buffett - are both sleeping well and smiling after they wake up.




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