Smart Money - What's Warren Buffett Buying?


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What’s Warren Buffett buying? What Buffett is buying should be of interest to anybody, after all he is one of the best investors out there, not to mention one of the richest. His Berkshire Hathaway made two large acquisitions last year: NV Energy and Heinz. Find out more in these slides.

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Smart Money - What's Warren Buffett Buying?

  1. 1. Invast Insights Week Commencing May 12, 2014
  2. 2. | 1800 468 278 This week we look at the following topics: What’s Warren buying? We follow the smart money and see what Buffett is buying for his investment vehicle. Bank earnings season, NAB and Westpac report Two more Australian banks reported last week, we find out what they said and where they’re going. The DAX and Draghi – where to next? It’s one of the most traded markets in Europe and very popular among our clients. We look at the numbers. Technical update on the Brent crude price The lifeblood of the global economy. We tell you where it is going.
  3. 3. | 1800 468 278
  4. 4. | 1800 468 278 What’s Warren buying? Some of you who read this report are purely traders focused on market movements. Some might be investors who look at fundamentals. Some occasionally fall into both categories. Others haven’t yet figured out which category they fall into. Regardless of what you trade and how you trade, following the smart money is always a clever choice in markets. Track record is important. Every experienced market participant will always want to look at the track record of a trade, an investment or anything else being sold to them which promises to make money. If you are a forex trader looking at implementing an ex - expert advisor trading robot, the first thing you do is backtest and look at track record. With that in mind, this week we focus on one of the most successful people in financial markets. He is Warren Buffett. One of the richest people in the world. He’s rich and he knows how to make money. This is not
  5. 5. | 1800 468 278 directly an article about ketchup but you will find out why we have a bottle as the feature image as you read on! Before all you savvy traders start discarding this post, take a deep breath and please read on. It’s not a sin for a day trader to look at what Buffett is doing. It’s ok! We aren’t proposing you drop your system, strategy or focus on markets and try to copy Buffett. This is inappropriate, what we are suggesting however is every now and then it is worthwhile looking at people in markets who have successful track records and seeing where they are placing their money. Even if you are a short term trading focused on immediate profits, it doesn’t hurt at all to see where the big money is positioning themselves and hopefully getting on the right side of the momentum when it eventuates. Sometimes it’s good to get the big picture. Buffett hasn’t been buying many things recently, certainly not as aggressive as he was during the depths of the financial crisis where he saw good opportunity and done some major deals. Buffett isn’t perfect either. There
  6. 6. | 1800 468 278 are many traders out there who can beat his performance in the interim but over a long period of time it is hard to compete with Berkshire Hathaway’s performance. No matter how good you might think your trading strategy or system is, over the long term, consistent gains are difficult to replicate, unless you have patience and control of your strategy. That is why we constantly talk about having the right frame of mind in this publication. We have spent numerous occasions over the past year focusing on certain guides and forecasts to help you get the wiring of your mind right. To help you get your way of thinking in the right place and hopefully to get you in a position where you are organised, you are disciplined and consistent in your overall trading or investing strategy. What Buffett is buying should be of interest to everybody. We don’t propose you go out and buy the same investments and hold them forever like him. What we do suggest is that the themes he is chasing will be prominent over the medium to long term and every time you place a trade it is helpful to have those long term themes in place. You might be day trading the Euro against the US Dollar for a few pips here and there but if the ECB comes into
  7. 7. | 1800 468 278 the market and starts cutting interest rates, to help export nations, your position might be at risk and having the fundamentals in the back of your mind does not hurt you at all. If there is a big shortage of a certain commodity into the future, traders can exploit the squeeze on price which will eventuate. So where is he placing his money? Buffett’s Berkshire vehicle made two large acquisitions last year spending almost US$18bn. The companies he acquired were NV Energy and H.J. Heinz. Pretty simple really. NV Energy is a public utility based in the US state of Nevada. It has a very strong penetration into the energy distribution market. It provides natural gas and powers around 2.4m customers. This represents around 88% of Nevada’s population. It’s a retail distribution business but the reason Buffett wants the business is because the underlying utility it distributes to its customers is likely to continue rising in price over the medium to long term. The real upside in the business is from its investments in the renewable energy space. Buffett doesn’t just want to purchase a renewable energy technology business with a lot of promise, he wants a solid business with huge market penetration that
  8. 8. | 1800 468 278 has upside through renewable energy. This should be a careful reminder for all you investors out there when trying to seek upside. The smart money shows us that upside is possible but the vehicle you invest in matters just as much. It’s all very well to invest in a potential life changing technology – a new drug, a new form of energy, a new piece of technology – but you don’t want to be in a business that has one product and its future is dependent on that technology working. You want to buy a drug company that has a nice position in the market with potential upside from new products, or a mining or energy company with existing operations with potential upside form new ventures. You want to purchase an IT or online business that is dominant in its field with potential upside from new services – like eBay for example and the upside it has through PayPal etc. Buffett made the energy acquisition through his energy holding company called MidAmerican. The business has become one of its largest non- insurance arms within Berkshire, generating US$10.8bn in pre-tax earnings for
  9. 9. | 1800 468 278 2013. Buffett clearly sees energy prices rising into the future despite all the rhetoric about the United States becoming energy dependent over the next few decades. If you are trading energy markets, you want to keep an eye on future acquisitions by Berkshire’s MidAmerican division and see just what types of renewable energy. The other acquisition is also fairly simple – Heinz. We all know the brand from our pantry shelves and super market aisles. Heinz manufactures thousands of food products in plants across the globe and markets these products in more than 200 countries and territories. The company claims to have 150 number one or number two brands worldwide. It is really an amazing business. The business is now owned by Berkshire and 3G capital and Buffett said last month that he intends to never sell a share in the business. Heinz is basically a play on food prices, there is a fair amount of volume growth opportunity as global populations increase but we are talking about a mature business here, not necessarily something with low penetration. The argument about China and India is perhaps not that relevant here. Diets and different and both the Chinese and Indian consumer food markets are very well developed and
  10. 10. | 1800 468 278 serviced anyways. What Heinz can do though is continue to increase its prices over time to reflect the diminishing value to currency and hence become a perfect inflation hedge, like Coca Cola, which is without surprise, a major investment of Berkshire Hathaway already. Warren is investing on two things – rising energy prices and rising food prices. The cost of things is going up. This is important to note if you are trading stocks, forex or commodities. You won’t necessarily make an immediate profit by just buying anything, but over the medium to long term you need to realise that the smart money is investing to hedge themselves against the value of paper currency. The average food price only needs to rise by a small amount of money each year to make the compounding effect on Heinz’s business significant over the next few decades. MidAmerican is buying guaranteed earnings with leverage to gradually rising energy prices and potential upside to renewable energy without having to worry about new technology working or not in the near term.
  11. 11. | 1800 468 278 Bank earnings season, NAB and Westpac report Last week we wrote about one of Asia’s largest banks – ANZ, which is listed in Australia. We spoke about the rising loan arrears and the potential trends which are emerging. We said that we would need to pass judgement on which geography is actually seeing an elevation in loan arrears until we had a better look at both National Australia Bank (NAB) and Westpac (WBC) numbers which came out last week. The data from NAB and WBC confirms what we were thinking – arrears in Australia are under control. The beauty about NAB’s reporting is that it breaks down its business segments and provides excellent disclosure. The Australian business is performing strongly and arrears in Australian loans have not seen a major increase over the period. The same story goes for Westpac which is a completely Australian focused bank.
  12. 12. | 1800 468 278 The problems for both NAB and Westpac though is that the Australian businesses are suffering from margin pressure. It’s becoming difficult for the domestic banks to maintain their pricing power as competition heats up. NAB’s result was driven by an improvement in the UK business which has been problematic for the past few years. Westpac continues to promote its local business and push hard in the residential mortgage lending space where it is fairly dominant across the Eastern states of Australia. Below we provide a snapshot of the arrears and asset quality trends for both Westpac and NAB from their recent interim reports.
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  14. 14. | 1800 468 278 Our net convictions aren’t changed from last week. In summary we think that CBA, NAB and WBC are all fairly valued and offer little attractive upside on current valuations. Our preference in the banking space is ANZ and while we a true believers of the Asian growth strategy we think there will be some pain to take through the balance sheet over the next few years. Because of that, we want to purchase ANZ at a reasonable discount and based on our analysis last week that discount would need to see the ANZ share price fall from its current level to around $27-28. If the shares fall to this level we would start adding to our model portfolios – even if there are Asian loan losses being announced. We aren’t discarding the banks, we are picking and choosing the entry points
  15. 15. | 1800 468 278 based on our own preferences.We have time on our side. The DAX and Draghi – where to next? We wrote about the DAX last October for our clients and went through the index constituents, pinpointing the few stocks that need to do well for the broader index to move higher. The DAX has risen around 11.8% since our report despite recently coming off its high levels. The performance has certainly been better than some of the Asian markets and while the US market has been scaling all-time highs, we think Europe is still yet to catch up completely. We thought it would be a good opportunity to touch base with the DAX index again in light of the ECB’s likely intervention in the market to contain the rise of the Euro in the coming few days.
  16. 16. | 1800 468 278 Chart: GER30 (DAX) daily price chart via Invast MT4 platform
  17. 17. | 1800 468 278 We have written about Draghi’s need to back his words up with action and the rally of the EURUSD towards the 1.4000 level for us spells a line in the sand. Germany – as a major export powerhouse – would be one of the main beneficiaries of lower interest rates although its capital in the ECB as the largest contributor would be an issue for central bankers to sort out separately. Our focus here is the stock market and not necessarily the sovereign situation.The key index constituents for the DAX are listed below:
  18. 18. | 1800 468 278 These are the top 10 stocks on the DAX which combined represent around 66% of the total index weighting. What happens in these stocks is very statistically significant. There is massive concentration here. As you can see from the list, most of the stocks are in the business of exporting their goods and services to the global economy. The strong EURUSD is definitely a drag on their earnings. As the EUR weakens – potentially on Draghi’s comments – most of these companies should start to see their relative share price value become cheaper in USD terms and also their translated earnings higher as they repatriate funds back home to Germany for their shareholders. These businesses are all major beneficiaries of low interest rates – their cost of borrowing is benchmarked to the ECB’s interest rate policy and so they can continue to tap the market for cheap money and reinvest for growth. We call this the DAX double whammy – low interest rates and potentially a central bank who wants to ensure corporate competitiveness through capping exchange rates. Draghi has not yet moved but we feel the ECB will have to do something. We see EURUSD 1.4000 as being ‘out of the question’. We see these DAX names as major beneficiaries. The DAX may have rallied
  19. 19. | 1800 468 278 well since October but we think the gains will likely continue. As you can see from the chart the current price action suggests some support near current levels but there is a chance that momentum will start slowing in May. In terms of the largest index constituent Bayer, it recently reported a 5% increase in its underlying operating earnings for the first quarter of this year when compared to the prior corresponding period. Bayer’s Healthcare division sales were 3% higher which is a little to the negative side on face value but when adjusting for the higher EUR against other counter parts, sales were actually 8.9% higher in constant currency terms. Let us reiterate that point. Bayer’s Healthcare division sales were only 3% higher in EUR terms but on a constant currency basis (stripping out the EUR’s impact) the group’s sales were actually three times that amount at 8.9%. The largest stock in Germany through this example is showing us just how much the higher EUR is hurting ordinary corporate earnings. The corporate sector will continue to lobby hard over further currency appreciation. Draghi is
  20. 20. | 1800 468 278 listening but he needs to act. When he does, stocks like Bayer will push the DAX higher. Bayer expects the full financial value of the higher EUR to impact its 2014 sales by around EUR800m and reduce its earnings by EUR450m!
  21. 21. | 1800 468 278 Technical Update On The Brent Crude Price When we sat down to discuss as a team last week what the latest movements in the Brent crude price were suggesting, we reached a unanimous verdict – nothing much! Brent continues to trade wildly within boundaries of US$105 and US$110, with an overall bearish tone. We notice support levels building up around US$107 and this is the key support level to focus on in the next few days (as of the time of writing). We also like to point out that the Stochastic Oscillator still points for potential move lower than the current market price at US$108. The US$107 level is crucial as there are no significant support levels until US$105.50 should support at US$107 become breached. From a medium term time frame we are definitely looking for a bounce in Brent Crude to occur, either from US$107 or US$105.50.
  22. 22. | 1800 468 278 Chart: Brent crude daily chart via Invast MT4 platform
  23. 23. | 1800 468 278 Key resistance to the upside remains at US$108.70 and US$110.50. Taking a look at the shorter time frame of 4 hours, US$108.70 is the key resistance level to monitor. This is where the Ichimoku cloud resistance ends. For Brent to push higher, it will need to close above US$108.70. Between US$108.70 and US$110.50 we would also like to point out the longer term resistance trend- line building up around US$109.50-75. This will be the next resistance above US$108.70 before ultimately facing US$110.50 key resistance, that has capped Brent from progressing any further in the past two months.
  24. 24. | 1800 468 278 Chart: Brent crude four hourly chart via Invast MT4 platform Visit our blog to get up-to-date market data and insights.
  25. 25. | 1800 468 278 7.0 Disclaimer Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us. General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
  26. 26. | 1800 468 278 Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances. General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. *Distributed with the permission of